Market eyes Tilray; Microchip improves dollar-neutral; Illumina active on stock move

By Abigail W. Adams

Portland, Me., Oct. 4 – Market players were eyeing what was described as one of the most interesting convertible deals of the year on Thursday – Tilray Inc.’s $400 million offering of five-year convertible notes.

Tilray priced an upsized $450 million of five-year 5% convertible notes after the market close on Thursday with an initial conversion premium of 15%.

The deal is the second Rule 144A deal from the cannabis industry to be brought to market in 2018 and the first U.S. dollar-denominated deal.

In a Rule 144A and Regulation S deal in June, Canopy Growth Corp. priced an upsized C$500 million of 4.25% convertible notes due 2023. The notes have skyrocketed alongside stock since pricing.

While market players eyed the new paper in the works, the deals to hit the secondary space on Wednesday faded from focus.

After dominating trading activity on Wednesday, Boingo Wireless, Inc.’s 1% convertible notes due 2023 were slow to trade on Thursday with the notes unchanged dollar-neutral.

Apollo Commercial Real Estate Finance, Inc.’s 5.375% convertible notes due 2023 were also inactive during Thursday’s session with the few trades seen at issue price.

Microchip Technology Inc.’s convertible bonds were active and improved on a dollar-neutral basis as they dropped outright alongside stock.

Illumina, Inc.’s convertible notes were also active after a large drop in stock with one tranche expanding while others remained unchanged.

Tilray eyed

Tilray priced an upsized $450 million of five-year 5% convertible notes after the market close on Thursday with an initial conversion premium of 15%.

The deal, which was upsized from a planned $400 million, priced in the middle of talk for a coupon of 4.75% to 5.25% and an initial conversion premium of 12.5% to 17.5%.

Underwriters are marketed the deal with a credit spread of 500 basis points over Libor and a 40% vol., which models about 5 points cheap, a market source said.

However, other sources pegged the credit spread at 800 bps over Libor.

With a credit spread of 800 bps over Libor and a 50% vol., the deal modeled about 15 points rich, a source said.

While the company has a market cap of $14 billion, it only generated a couple million in revenue in the last quarter, a source said.

The company has limited credit history with its IPO in July.

The stock has surged since its IPO of $17.00 with stock shooting past $300.00 in intraday trading on Sept. 19 – the wild price swings halted trading several times during the session.

Tilray stock closed Thursday at $145.57, a decrease of 7.18%.

While the deal would be attractive to hedge players, especially given the coupon, there is no borrow on the stock, sources said.

The “million dollar question” is if something will be done to help facilitate the borrow, a market source said.

While the lack of a borrow is a deterrent for hedge players, the deal was heard to be oversubscribed prior to the public launch with a wall crossed investor base, sources said.

“It’s certainly not for everyone,” a source said. However, the paper was heard to be in demand.

An interesting industry

Tilray is the latest cannabis company to tap the convertibles market and the first to price a dollar-denominated deal.

Canopy Growth priced a Canadian dollar-denominated Rule 144A and Regulation S deal in June.

The 4.25% notes due 2023 skyrocketed alongside stock in August after Constellation Brands, Inc. announced a C$5 billion investment in the company.

The 4.25% notes were last seen at 150.68 at Wednesday’s close.

Sources were uncertain whether Tilray’s convertible notes would follow a similar course given Tilray’s recent stock spike. However, the sector is interesting, several sources said.

“Marijuana companies are a great place to be going forward,” a market source said. “The question is, are the valuations there on these companies?”

It may be awhile before the revenue generated by companies such as Tilray match their valuations, the source said.

Several people may be playing the marijuana companies with the hopes outside companies like Pepsi Co. and Coca-Cola will get involved.

Day 2

The new convertible paper to price over the past week faded from focus during Thursday’s session.

Boingo’s 1% convertible notes due 2023 saw few bonds trade after dominating the space on their Wednesday debut.

The notes were seen as high as 105 bid with stock up early in the session but dropped to 103.5 as stock traded down.

The notes were unchanged dollar-neutral, a market source said.

Boingo stock closed Thursday at $33.30, a decrease of 0.72%.

The 1% notes expanded about 2 points dollar-neutral during Wednesday’s session.

Apollo’s 5.375% convertible notes due 2023 were also slow to trade on Thursday. The few bonds that did trade changed hands at the 98.5 issue price.

The 5.375% convertible notes have largely hovered around their issue price since hitting the market on Wednesday.

Microchip expands

Microchip’s convertible notes were active and making gains on a dollar-neutral basis as stock dropped on Thursday.

The 1.625% convertible notes due 2025 were down 10 points outright to trade at 136.5 versus an equity price of $71.08, according to a market source.

About $20 million of the bonds were on the tape by the late afternoon.

The 1.625% convertible notes due 2027 dropped to their lowest outright level in recent history with the notes closing the day below par.

They were down about 4 points outright and were seen trading at 99 versus an equity price of $72.12. About $8 million of the bonds were on the tape by late afternoon.

The notes expanded about 0.5 point dollar-neutral, a market source said.

“They’re doing well today,” a source said. “They’re finally performing to the downside.”

Microchip stock closed Thursday at $71.43, a decrease of 4.91%.

The notes have improved dollar-neutral since a spike in the company’s vol. after its August earnings report.

Illumina active

Illumina’s convertible notes were also active as stock traded down during Thursday’s session.

The 0% convertible notes due 2019 were down about 6 points outright to trade at 136.639 versus an equity price of $343.17.

About $12 million of the bonds had traded by mid-afternoon.

The notes trade at just about parity, a market source said.

Illumina’s 0.5% convertible notes due 2021 also dropped about 6 points outright. They were seen trading at 143.25 versus an equity price of $357.99.

The notes were expanding about 0.375 point dollar-neutral. About $6 million of the bonds had traded by mid-afternoon.

Illumina’s recently priced 0% convertible notes due 2023 were less active. While the notes were as high as 112, they traded down to 107.5 during Thursday’s session.

The notes were moving in-line dollar-neutral, a market source said.

Illumina stock closed Thursday at $344.71, a decrease of 4.14%

Mentioned in this article:

Apollo Commercial Real Estate Finance, Inc. NYSE: ARI

Boingo Wireless, Inc. Nasdaq: WIFI

Canopy Growth Corp. TSE: WEED

Illumina, Inc. Nasdaq: ILMN

Tilray Inc. Nasdaq: TLRY

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