Morning Commentary: Envestnet convertible notes offering eyed; strong demand expected

By Abigail W. Adams

Portland, Me., Nov. 14 – The convertibles primary market returned to action on Monday with the first deal of November on deck.

Envestnet Inc. plans to price $350 million of five-year convertible notes after the market close on Monday with price talk for a coupon of 2.625% to 3.125% and an initial conversion premium of 27.5% to 32.5%.

The deal was in the market with assumptions of a 400 basis points credit spread and a 33% vol., according to a market source.

Using those assumptions, the deal looked about 3 points cheap at the midpoint of talk.

The deal looked good with the valuation in line with the financial technology company’s outstanding 0.75% convertible notes due 2025 and 1.75% convertible notes due 2023, a source said.

Proceeds from the new offering will be used to repurchase a portion of the company’s outstanding convertible notes in privately negotiated transactions.

Both tranches are being targeted for repurchase with the amount determined by market sentiment, a source said.

Allocations for the new offering are expected to be tight with the deal to largely be placed with existing holders, another source said.

However, demand for the offering is expected to be strong with Envestnet deals showing historical outperformance on their market debut.

“In the past, these have been 2.5 points to 3 points out of the gate,” a source said.

While the buyback and capped call may dent the new notes’ debut, the new paper will be index eligible.

Envestnet’s offering is the first new deal of November with earnings and the continued fragility of the market keeping potential issuers at bay.

However, if equity markets remain stable following last week’s rally, sources are expecting a burst of new deal activity in the coming weeks, especially in the form of refinancing deals.

Companies may be motivated to get deals done before the new year when outstanding issues turn into liabilities on the balance sheets, a source said.

Meanwhile, it was a sleepy start to the week in the secondary space with volume thin as equities struggled to find direction.

Indexes were mixed following the historic gains of the previous week with the Dow Jones industrial average up 40 points, or 0.11%, the S&P 500 index was down 0.08%, the Nasdaq Composite index was down 0.55% and the Russell 2000 index was down 0.22% shortly before 11 a.m. ET.

There was $30 million in reported volume about one hour into the session with few names seeing concentrated trading activity.

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