Morning Commentary: Primary market eyes Evolent Health convertibles; Cree notes in focus

By Abigail W. Adams

Portland, Me., Oct. 17 – While primary market activity is expected to remain subdued throughout earnings season, one new convertibles deal is in the works.

Market players were eyeing Evolent Health Inc.’s $125 million offering of seven-year convertible notes, which is expected to price after the market close on Wednesday.

Sources pegged the deal between fair value and ½ point cheap at the midpoint of talk based on underwriters’ assumptions, which sources said were more conservative than some of the deals seen over the past year.

With several of the low coupon tech deals that have priced in 2018 now trading well below par, there is good reason for the caution, a source said.

Cree Inc.’s 0.875% convertible notes due 2023 were described as a “perfect example” of a convertible that has “gotten chopped up in the last couple of months,” the source said.

The 0.875% convertible notes were active early in Wednesday’s session and making nominal gains on an outright basis after reporting a large earnings beat. However, the notes were still trading well below par.

Evolent Health eyed

Evolent Health plans to price $125 million of seven-year convertible notes after the market close on Wednesday with price talk for a coupon of 1.25% to 1.75% and an initial conversion premium of 30% to 35%.

Underwriters are marketing the deal with a credit spread of 400 basis points over Libor and 40% vol., a market source said.

Sources pegged the deal between fair value and 0.65 point cheap at the midpoint of talk.

The credit spread for the health care services technology provider is wider than many of the deals seen from the tech sector.

“People lost a lot of money in software in the last couple of months,” a market source said, particularly in the low coupon convertible notes whose underlying equity tanked.

The coupons help the bond hold its value on the downside. “This one has a little more of a legitimate coupon,” the source said.

Evolent Health’s stock was down 4.47% early in Wednesday’s session. The downdraft was most likely the result of hedging activity in preparation for the deal, a market source said.

Cree in focus

Cree’s 0.875% convertible notes due 2023 were “a perfect example” of a low coupon convertible note from the tech sector that has lost value in the past couple months.

The notes were the focus of trading activity early Wednesday with more than $8 million of the bonds on the tape.

They were seen changing hands around 93.25, about a 0.25 point gain on an outright basis.

Cree stock was up 2.4% after reporting a large earnings beat for the first quarter of 2019 after the market close on Tuesday.

Cree reported non-GAAP earnings per share of 22 cents, versus analyst expectations of earnings per share of 12 cents.

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