Huize to pre-market IPO this week

Convertible bonds may have reached a tipping point last week amid a flood of aggressively priced deals. Overall, nine companies raised US$5.1bn last week through new issues, the most by volume since August 2016 and by number since November 2013. Insulet, a US$9.5bn market cap maker of insulin pumps, damaged investor sentiment on Tuesday, in the view of many market participants, with a new US$700m seven-year CB. The deal printed at 0.375%, up 35%, the aggressive ends of talk, and was upsized from a US$660m target. There was strong investor demand, particularly from the outright community, but the deal was poorly executed. Outright investors groused about a last-minute spike in the underlying ahead of pricing caused by short-covering by arbs that participated in a concurrent repurchase of a deep in the money CB. Insulet shares spiked then cratered, leaving outrights wearing losses. Insulet’s 0.375% CB traded at 98.50 by week’s end. In addition to Insulet, Florida utility NextEra Energy, online real estate broker Zillow, and cloud identity management provider Okta powered into the market with US$3.6bn of new paper. Smaller issuers are being forced to pay up as well. Aerie Pharmaceuticals, an US$850m market cap biotech that last year commercially launched its first drug, bridged its funding needs with US$275m raised from the sale on Wednesday of a five-year CB. Bank of America Merrill Lynch, Citigroup and Stifel were able to boost sizing from US$250m to US$275m, but only by pricing at a 1.5% coupon and 35% conversion premium, toward the investor-friendly ends of 1%-1.5% and 32.5%–37.5% talk. “Healthcare deals always sell well,” said one banker involved in Aerie trade. “But the whole market dynamic is not very conducive to deal making. We were helped out by a large equity holder that participated.” Aerie shares fell 9.3% over the one-day marketing on Wednesday to US$18.50. Aerie generated US$15.8m of revenue in the second quarter from sales of its Rhopressa eye-care drug. In conjunction with the release last month of the quarterly results, the company lowered full-year 2019 revenue projection to US$70m-$80m, from US$110m-$120m, and increased expected cash burn for the year from US$130m-$140m to $160m-$170m. Aerie had US$109.4m of cash at June 30 with another US$200m available to it on a credit facility. As part of the new CB, the company terminated that credit facility, though it purchased a call spread to offset dilution consideration to share prices above US$37, a 100% premium to replicate a debt-like alternative. Encore Capital, a bad debt collector, weighed in on Wednesday with a US$100m, six-year CB that priced at a 3.25% coupon and 25% conversion premium, the wide end of 2.75%-3.25% and 25%-30% talk. An 11.1% sell-off in the underlying over the one-day marketing period was followed by a 6.6% rebound to US$34.10, highlighting a more hedge-fund oriented allocation, bankers on that deal told IFR. Bank of America Merrill Lynch, Credit Suisse and SunTrust Humphrey were joint bookrunners on the Encore CB. Invitae, a lab diagnostics company, saw its shares fall 8.6% on Thursday to US$21.24 while it was touting a debut five-year CB. JP Morgan, sole bookrunner, was able to boost the size of the offering from US$200m launched to US$300m ahead of pricing at a 2% coupon and 40% conversion premium, the mid-point of 1.75%-2.25% and 37.5%-42.5% talk. Capping the week’s activity, French-domiciled, Nasdaq-listed software developer Talend secured €125m from the sale of a five-year CB on Thursday that priced at 1.75%, up 47.5%, the wide end of talk. Goldman Sachs and JP Morgan were joint bookrunners.

After a series of high-cost financings in the local market, biotech Bellus Health turned to a US$70.3m cross-border Nasdaq listing to lift its profile. Bellus’s shares rose 1.2% to C$9.45 (US$7.18) over the three-day marketing period, albeit on limited volume. Jefferies, Cowen and Guggenheim Securities used a “limited” wall cross ahead of the Tuesday pre-open launch to lock in significant anchor interest. They placed 9.9m new shares on Thursday at US$7.10. The stock traded at midday on Friday at US$7.10. Bellus last month conducted a 2.6-for-1 share consolidation to boost its share price and allow it to meet the US$4 per share minimum requirement to list on Nasdaq. Bellus, which raised C$35m last December at C$0.95 a share and $20m a year earlier at C$0.38 a share, plans to use the proceeds to fund Phase II trials of its chronic cough drug, BLU-5937, as well as support other trials and commercialisation efforts. After a successful Phase I trial to test tolerability and safety, the biotech kicked off a Phase II trial on BLU-5937 with top line data expected in the middle of 2020. Only one of the 24 patients that participated in the Phase I trial (5%) reported altered taste, versus 80% for an already approved treatment made by Merck.

European structured equity ended the week in relatively rude health, as the first week post summer ended with a trio of €500m-plus new issues and a tap that took issuance to over €2bn. One thing stands out across the three new issues – not one was pre-sounded. The lack of a wall-crossing exercise is fairly unusual in Europe: even if many bankers do not really like the practice, it has become commonplace. Yet not completing pre-sounding seems to have been barely a discussion point. It is no coincidence that bankers working on this week’s deals cited the strong positive engagement of hedge funds on both sides of the summer break. While pre-sounding can be useful for a difficult name or structure, it was more often used to pad the book at launch. Fast-moving hedge funds can instead provide natural momentum. The flow of deals also provides an answer as to whether issuers will be distracted by DCM bankers offering negative yields on their way to meet convert bankers. Share price performance was an obvious help in getting the latest issuers to market. Veolia Environnement conducted a €700m liability management exercise on Thursday, replacing its 2021 converts with 2025s. Its shares had risen 3.4% on Wednesday, which ensured that the 35% premium achieved on the new issue gave a conversion price of over €30: €30.41, to be precise. Groupe Bruxelles Lambert similarly swooped on a modest rise in LafargeHolcim’s share price over the course of the week for its latest exchangeable bond, which raised €750m. Capitalising on a share price move also necessitates the absence of pre-sounding due to the time cost. Veolia and GBL lacked the sexy underlying of Edenred (see Top News) so were much lower delta affairs, but attracted good interest and delivered good terms for the issuers. Veolia’s January 2025s deliver a yield to maturity of -0.6% and have a premium of 35%, the best end of marketing for investors. The terms are close to those on its previous bond (–0.54%, up 47.5%) so effectively just push out maturity for four years. The tender for the 2021s secured 93% representing €650m principal purchased at €30.31 apiece, 10 cents below the new-issue price. Dilution moves very slightly from 4.13% to 4.07% once the last bonds have been taken out. Some investors tendered but did not buy more bonds, so there was some work to be done to fill the book. Belgian holding company GBL is a regular issuer of convertible and exchangeable bonds, but this was the first time it has used LafargeHolcim as the underlying. GBL opted for a long three-year of December 2022 for bonds where the underlying represents about 2.2% of the Swiss construction materials company, and a little less than a quarter of its stake. The bonds were offered with a premium of 30%-35% and a yield of -0.75% to -0.30%. The implied volatility at worst for the issuer was 19%, in line with the three-month level and compared with six-month vol of 21.5%. Pricing came at the high end of the yield range at -0.30%, but the premium could be pushed to mids of 32.5%. Veolia’s convertible and liability management exercise was led by joint global coordinators BNP Paribas and Natixis, with joint bookrunners Credit Agricole and HSBC. GBL entrusted Citigroup and Goldman Sachs as global coordinators and BNP Paribas and Bank of America Merrill Lynch as bookrunners.

Zillow’s real-estate ambitions are matched only by its fondness to fund expansion with convertible debt, lowering its borrowing costs and extending stock dilution to elevated share prices. In its most ambitious foray so far, Zillow landed US$1.1bn from the sale Tuesday night of five- and seven-year CBs, sized at US$600m and US$500m. The online real estate brokerage now has US$1.9bn of CBs in its capital structure. “This financing is definitely about growth capital,” a banker involved told IFR. “They are a well-known issuer and this is the largest financing in their complex. There is going to be a ramp up period for their (Zillow Offers) business.” Zillow shares fell 2% Wednesday while marketing the new CBs to US$32.23, extending losses that had seen the stock trade at US$49.75 last month ahead of disappointing Q2 results. The company offset some of that blow by spending US$150m of the proceeds raised on a derivative that hikes earnings dilution recognition to undisclosed ultra-high share. The US$600m five-year CB printed at a 0.75% coupon and 35% conversion premium, and US$500m seven-year at 1.375%, up 35%. Both came toward the investor-friendly ends of talk, or 0.5%-1% and 35%-40%, and 1%-1.5% and 35%-40% respectively. Joint bookrunners Morgan Stanley, Citigroup, Goldman Sachs, Bank of America Merrill Lynch and Credit Suisse had marketed two equally-sized, US$500m tranches before upsizing the five-year on strong demand. Zillow is scaling an ambitious, and controversial, business of directly purchasing and reselling homes. From an initial home sale in April 2018, the company’s home-buying unit sold 786 homes in the second quarter that contributed US$248.9m of the US$599.6m of sales for the period. Zillow Offers, the unit, also created a US$56.5m drag to the $2.3m of adjusted Ebitda. Zillow beat on the top-line and missed on the bottom. Zillow’s move into real-estate ownership, a path followed by rival Redfin, ties up a lot of capital, and inventory has swelled to US$552.8m at June 30 from US$162.8m at the end of 2018. Continued expansion - it recently added three new cities to 14 currently and is targeting 26 cities by the middle of next year - will increases losses at Offers. Analysts at Jefferies estimate Offers will lose US$75m in the third quarter. Offers represents a massive opportunity. Within three to five years, Zillow hopes to generate annual Ebitda and revenue of US$600m and US$2bn. “The biggest investor pushback on this business is the operating model, with many suggesting that breakeven will prove more difficult than bulls believe,” said Jefferies analyst Brent Thill in a note to clients last month. “We view Zillow as a long-term investment rather than a short-term trade,” added Thill, who rates the stock a Hold with a US$45 price target. Steve Eisman, a PM at Neuberger Berman and author of “The Big Short”, is among the bears, last month on CNBC labelling Zillow “one of the most flawed business models I’ve seen in a very, very long time”.

It would hard to fault Insulet management for exchanging high-fives on Tuesday after securing US$700m from the sale of a seven-year convertible bond. The insulin pump maker wound up paying just 0.375% annually, with dilution mitigated through buying back the bulk of an existing CB that is deep in the money and employing a derivative to boost the effective conversion price on the new issue to double the current share price. Insulet shares spiked 8.9% over the one-day marketing period to US$167.95 - evidence of the strong investor demand. The call-spread purchased for US$75m hiked dilution to US$335.90. JP Morgan and Morgan Stanley increased the offering size from US$660m to US$700m and printed at the 0.375% coupon and 35% conversion premium, the aggressive ends of initial talk that was tightened to 0.375%-fixed and 32.5%-35% late in the bookbuild. “We’re heavily oversubscribed on high-quality demand from outright investors,” one banker involved in the underwriting said on Tuesday afternoon shortly after the terms were revised. Not all investors, whether outright or arbitrage, were happy with the deal execution. Insulet bought back US$225m principal of 1.25% CB due 2021 that was eligible to convert at US$58.37 for US$445m in cash and 1.16m shares, or a total consideration of roughly US$640m. Rollover financings are commonplace in the CB market and, when executed properly, should result in limited impact on the underlying shares. Because arbs are already short a delta-one CB, they simply roll over the position into the new deal. However, arbs that participated in the buyback of 2021s were not filled, forcing them to rapidly close their shorts - in the last 15 minutes of trading on Tuesday, Insulet shares rocketed from US$156.18 to US$167.95. Outright investors, assessing the bonds on an absolute conversion price, were forced to reevaluate the merits, and some did pull orders as a result, according to a second banker involved in the underwriting. Insulet plunged 6.5% on Wednesday to US$157.12 with the new CB quoted at 98.75, according to Refinitiv data. “Deal of the year,” quipped one rival sarcastically. In a similar refinancing, Okta’s shares fell just 25 cents to US$127.94 on Wednesday while marketing a new US$1bn, six-year CB. The cloud identity software provider bought back US$225m principal of a 0.25% CB convertible at US$48.36 for total consideration of roughly US$600m (US$225m cash and 3m shares), with US$70m spent on a call spread to offset dilution to a 100% premium. Goldman Sachs, Morgan Stanley and JP Morgan placed the new CB at a coupon of 0.125% and conversion premium of 47.5%, after marketing at 0%-0.5% and 40%-45%. Rollover financings are a high-class problem. Insulet, a serial CB issuer, has made a ton of money for investors and it is hard to fault it for shifting toward an outright investor base. It is, however, poor messaging on the part of investment banks to have failed to communicate that transition.

French employee benefits and payments company Edenred set a new low for yield in Europe’s primary market, breaking the record for negative yield set just weeks earlier. There was no pre-sounding ahead of launch for the €500m deal despite the fact it was coming from a debut issuer and was the first convertible bond out of the traps in Europe following the August break. Similarly the previous European structured equity deal, a €600m CB at the end of July for French electronic payments company Worldline, was not pre-sounded despite it being the issuer’s debut in the market. Pre-sounding has been the norm on nearly all deals, bar well-known repeat issuers, for several years. “There was no pre-sounding but Edenred is a good name, with a great equity story and a strong rating; it ticks all the boxes,” said a banker at one of the global coordinators. Another banker involved said that books had been covered by 9am in Paris and the deal wrapped up multiple times covered. Edenred’s five-year bonds were offered with no coupon and use the standard French OCEANE structure, which allows for the delivery of new or treasury shares. The deal is opportunistic and capitalises on the company’s elevated share price that reached a record close in August of €46.37. Shares closed at €44.07 on Monday and slipped less than 1% despite the new issue on Tuesday to remain up more than a third in 2019. THROUGH ONE PERCENT The CBs were priced with a massively negative coupon of –1.53%, trumping the previous record of –0.96% set by Worldline, though that was on seven-year paper. Investors in the straight debt market are seeing new records set on euro issues on a weekly basis and the structured equity market looks to be following the same path, though probably more sporadically. The bonds were offered with an issue price of 105.5%–108% for a yield to maturity on guidance of –1.53% to –1.06% with a premium range of 35%–40%. Terms were set at the best ends for the issuer. There are no clear peers for Edenred, but an S&P rating of BBB+ and outstanding straight bonds gave a clear credit assumption of 45bp. On that basis, implied vol was punchy at 22.5%–29% versus historic vol over 100 days at 22.6% and over 250 days at 25.2%. Outstanding straight bonds have maturities of 2025, 2026 and 2027, making a five-year bond maturing in 2024 a good fit for the overall maturity profile. There is a call at three years subject to a 130% trigger. The reference price of €43.66 gives a conversion price of €61.13 at the 40% premium. The bond floor at issue was 100.4%. The bonds were bid at €66.30 on Thursday. “It was definitely an opportunistic move to set the conversion price significantly above the all-time high,” said a third banker involved. The book totalled more than 100 lines and included strong demand from hedge funds and long-only accounts, with the third banker noting the importance of the former in building momentum. Proceeds will be used for general corporate purposes, including for financing external growth. Edenred’s footprint in ECM has been relatively light in recent years, with just exits through accelerated bookbuilds by Eurazeo in 2013 and Colony Capital in 2017. BNP Paribas and Societe Generale were global coordinators on the CB, and bookrunners with Credit Agricole, JP Morgan and HSBC. WHY BOTHER? Investors in straight debt have come to terms with new issues coming at negative yields, but equity-linked bankers do not think this has to be a problem for convertible issuance. “When you see Engie pricing a straight bond at a negative yield, everything is possible in this environment,” the third banker said. Engie and Orange in August became the first European corporates to price bonds with tenors longer than five years at a negative yield. “The difference between a bond holder and a convertible holder is that the latter can make money on the option component, the return can be positive as opposed to a bond holder who pays to get risk in his book.” Will issuers

Pricing dateIssuerAmountMaturityCoupon (%)ReofferSpread (bp)Yield (%)Pricing stepsNIP (bp)Book sizeRatingsBookrunnersDistribution Sep 2 2019 Skyfame Realty US$100m incr (US$205m) Jul 8 2022 13 100 - 12.98 100 - - -/-/B- CNCBI/Dongxing/Kaiser/FLRS/Kaisa - Aug 29 2019 Suzhou City Construction US$300m Sep 5 2022 4.6 100 - 4.6 4.8% area, 4.6% - - - Guoyuan/Dongxing/Fosun Hani/BoC/CNCBI - Sep 3 2019 CK Hutchison US$500m Sep 6 2029 2.75 99.446 T+135 2.814 T+150 area, T+140 area 10 US$850m A2/A/A- BAML/CIBC/GS/HSBC/MS Asia 44%, US 33%, Eur 23%. FM 55%, Ins 20%, Bks 19%, Public sector 3%, Other 3%. Sep 3 2019 CK Hutchison US$750m Sep 6 2049 3.375 98.845 T+150 3.437 T+175 area, T+160 area 10 US$1.85bn A2/A/A- BAML/CIBC/GS/HSBC/MS Asia 67%, US 22%, Eur 11%. FM 75%, Ins 17%, Bks 4%, Public sector 2%, Other 2%. Sep 3 2019 BPI (green) US$300m Sep 10 2024 2.5 99.641 T+120 1.377 T+145 area, T+120/125 - >US$1.25bn Baa2 BPI/BAML/Citi/CS/Miz/UBS Asia 81%, EMEA 19%. AM/FM 56%, Bks/FI/PB 30%, Ins/Pens/Corp 14%. Sep 3 2019 Clifford Capital (Singapore govt gtee) US$300m Sep 10 2024 1.733 100 T+35 1.733 T+35/37 - US$300m -/AAA DBS/HSBC/StCh - Sep 3 2019 BOC Aviation US$500m Sep 11 2029 3 99.18 T+165 3.096 T+185 area, T+165/170 - US$1bn -/A-/A- BOCI/Citi/DBS/GS/HSBC/JPM/WFS Asia 49%, US 44%, EMEA 7%. AM/FM 59%, Ins 20%, Tsy 19%, PB/Other 2%. Sep 3 2019 Grupo Bimbo SAB de CV US$600m Sep 6 2049 4 98.334 T+215 4.097 T+240 area,T+220 (+/-5) - US$2.3bn Baa2/BBB/BBB BBVA/Citi/JPM/MS/MUFG/ING - Sep 3 2019 Zhangzhou Jiulongjiang Group US$500m Sep 10 2022 5.6 100 - 5.6 6.15% area - - -/-/BB+ BoC/Industrial/Guotai Junan/CEB Intl/CNCBI/CISI/CICC/Haitong /BOCOMI - Sep 4 2019 CCB Leasing US$300m incr (US$800m) May 16 2024 3.5 103.595 T+132.5 1.352 T+160 - - -/A/A HSBC/Miz/CCBI /ANZ/BoC/BoCom/BAML/SMBC Nikko. - Sep 4 2019 Rizal Commercial Banking (Sustainable) US$300m Sep 11 2024 3 99.751 T+170 3.054 T+195 area, T+170/175 - US$1.5bn Baa2 BAML/Citi/ING/SMBC Nikko Asia 96%, EMEA 4%. AM/FM 74%, Bks/Ins 18%, Corp/PB/Other 8%. Sep 4 2019 Chinalco US$750m Perpetual (Sep 11 2024) 4.1 100 T+278.8 4.1 4.7% area - US$6bn -/-/BBB+ BoC/BOCI/Barc/UBS/Haitong/HSBC/StCh Asia 95%, EMEA 6%. FM/AM 52%, Corp/Ins 32%, Bks 14%, PB/Sec 2%. Sep 4 2019 Shanghai International Port US$300m Sep 11 2024 2.4 99.794 T+108   T+140 area, T+110 +/-2 - US$2.7bn A1/A+ BOSC /BoC/JPM/UBS/DBS/ICBCI/CCBI /BoCom Asia 96%, EMEA 4%. Bks 66%, AM/FM 21%, Ins/SWF 12%, PB 1%. Sep 4 2019 Shanghai International Port US$500m Sep 11 2029 2.85 99.577 T+140 2.899 T+165 area - US$2.4bn A1/A+ BOSC /BoC/JPM/UBS/DBS/ICBCI/CCBI /BoCom Asia 94%, EMEA 6%. Bks 32%, AM/FM 46%, Ins/SWF 20%, PB 2%. Sep 5 2019 BBVA Bancomer US$750m Sep 13 2034 5.875 100 T+430.8 5.875 low 6%, 5.875% / 6% area - US$3bn Baa3/BBB/BB+ GS/HSBC/BAML/JPM/Santan/Scotia - Sep 5 2019 ICBC Macau (Tier 2) US$500m Sep 12 2029 (Sep 12 2024) 2.875 99.226 T+165 3.043 T+190 area, T+165-170 - US$2.4bn -/-/A- ICBCA/Citi/HSBC/ICBC Sing/ICBCI/ICBC Macau Asia 91%, Eur 9%. FM 53%, Public sector 24%, Ins 14%, Bks 6%, PB 2%, Corp/Other 1%. Sep 5 2019 Industrias Penoles US$550m 12 Sep 2029 4.15 99.862 T+260 4.167 T+300 area,T + 270 (+/-10) - US$3.1bn BBB/BBB BAML/GS/JPM/Santan/Scotia - Sep 5 2019 Industrias Penoles US$550m 12 Sep 2049 5.65 99.986 T+360 5.651 T+400 area,T + 370 (+/-10) - US$2.8bn BBB/BBB BAML/GS/JPM/Santan/Scotia - Sep 5 2019 Changchun Urban Development US$250m Sep 12 2022 3.9 100 - 3.9 4.5% area - - Baa1 Industrial/BOCOMI/Guotai Junan/OCBC /CMBC Cap/ICBCA/ABCI/BoC/CCBI /CEB Intl/StCh/DBS/Haitong /CMSHK/TF Intl/China Tonghai - Sep 5 2019 Dalian Wanda Group US$150m incr (US$550m) Jul 24 2022 7.5 98.105 - 8.25 8.25% - - - CS/Everbright HK/HSBC/CSI/BoC/CMBI/Nomura/CICC/CNCBI/ICBCI/SPDBI/Founder/Orient - Sep 5 2019 DBS Bank A$700m Sep 13 2022 3mBBSW+63 100 3mBBSW+63 - 3mBBSW+63 area - - Aa1/AA-/AA- DBS/CBA/NAB/WBC - Sep 5 2019 Indorama Ventures US$300m Sep 12 2024 4.375 99.627 T+310 4.459 T+335 area, T+315 +/-5 - US$650m - StCh/ANZ/BAML/HSBC APac 66%, EME

Pricing dateIssuerAmountMaturityCoupon (%)ReofferSpread (bp)Yield (%)Pricing stepsNIP (bp)Book sizeRatingsBookrunnersDistribution US DOLLARS                           Sep 3 2019 Icahn Enterprises US$500m Sep 15 2024 4.75 100 - 4.75 7.5% area - - Ba3/BB+ Jeff   Sep 4 2019 Iron Mountain US$1bn Sep 15 2029(Sep 2024) 4.875 100 T+342 4.875 4.875%/5% - - - Barc/HSBC/CA-CIB/JPM/WFS/PNC/MS/GS/Citizens   Sep 4 2019 Murphy Oil USA US$500m Sep 15 2029(Sep 2024) 4.75 100 T+329 4.75 6.125% area - - Ba2/BB+ BAML/FITB/Regions/WFS - Sep 4 2019 Yum! Brands US$800m Jan 15 2030(Sep 2019) 4.75 100 T+329 4.75 5.25%/5.5% - - B1/B+ WFS/GS/Citi/JPM/BAML/MS - Sep 5 2019 FMG resources US$600m Sep 15 2027 4.5 100 T+298 4.5 4.5%/4.75% - - Ba1/BB+/BB+ JPM/MS/CS - Sep 5 2019 Hill-Rom Holdings US$425m Sep 15 2027 4.375 100 T+286 4.375 4.5%/4.75% - - Ba3/BB JPM/BAML/Citizens/MUFG/PNC/WFS/GS - EUROS                           Sep 2 2019 Smurfit Kappa €750m Sep 15 2027 1.5 100 B+232 1.5 2% area, 1.625% area, 1.5% - >€3.9bn Ba1/BB+/BB+ Citi/CA-CIB(a), Danske/HSBC/NatWest(p) - Sep 2 2019 thyssenkrupp €1bn Mar 6 2023 1.875 99.633 MS+255 / B+295.4 1.986 MS+290 area, MS+255/260 25 >€2.9bn Ba3/BB-/BB+ CMZ/Citi/CA-CIB/DB/Santan/Uni -

SmileDirectClub has disrupted the cosmetic dentistry industry with its direct to consumer SmileStores and braces that massively undercut the market leader and hopes that success will enable a successful US$1.28bn IPO. Yet the chunky valuation premium sought to the peer is going to be tough to justify. JP Morgan and Citigroup are marketing 58.5m shares at US$19–$22 each for pricing on September 11. “Our initial thought is very bullish, but something is not lining up,” a buyside source said. “They have a lot more questions to answer than they should.” As with any IPO seeking a lofty valuation, growth is a key issue. Yes, sales more than doubled to US$373.5m at mid-year from the same period last year but slowing quarterly sales are a matter of concern. Second-quarter sales were up 10% on the first quarter to US$195.8m. The same comparison in 2018 showed 56% growth. SmileDirectClub raised US$380m privately in October, with private equity firm Clayton Dubilier & Rice leading the round at a US$3.2bn valuation. Less than a year later, SmileDirect is targeting an US$8.5bn valuation. The valuation is based on just under seven-times 2020 EV/sales, projecting revenues at around US$1.2bn, and is a big premium to Align Technology at 4.7-times sales. And CD&R is taking a profit. More than a third of cash is being used to repurchase shares from insiders. But the space that SmileDirectClub has quickly dominated – termed teledentistry – is compelling. SmileDirect was formed in 2014 to be a direct to consumer competitor to Align and its product Invisalign. SmileDirect sells a similar brace – called a “clear aligner” – directly to its customers at US$1,895, a fraction of the US$5,000–$8,000 orthodontists charge for Invisalign and other braces. More than 700,000 customers have used SmileDirectClub so far. It is active in the UK, Canada and Australia as well as the US. There is not much competition, with more recent start-ups not close to competing with SmileDirectClub yet. Crucially, Align is shut out of the space for the next three years. An early investor in SmileDirectClub, Align opened its own Invisalign stores, which an arbitrator ruled in March violated a non-compete agreement. Align was forced to sell its 17% equity stake and cannot reopen Invisalign stores until August 2022. SmileDirectClub will be hard to replicate. The company serves its customers online and at 300-plus so-called SmileStores, including in-store partnerships with Walgreens and CVS. It has also built a proprietary network of doctors that can write prescriptions and provide follow-up care for each patient online or in-store. There is one other potential regulatory issue to contend with. “I get the first-mover advantage” said the investor. “What happens if they get regulated as a dentist?” The company is about to defend a claim from the State of New Jersey Dental Association that SmileDirectClub is a corporate dentist, as opposed to a less-regulated dental service provider. “Anytime you do something disruptive, the status quo is going to push back,” said SmileDirectClub CFO Kyle Wailes on the online roadshow presentation. SmileDirectClub will have a chance to answer its critics in the market and in court.

The substantial pipeline of corporate issuance shows no sign of abating, with a variety of deals set for this week. After establishing its green bond framework PostNL, rated BBB from S&P, has arranged a series of meetings via Bank of America Merrill Lynch as green structuring advisor as well as a bookrunner with BNP Paribas and Commerzbank. A €300m bond is expected to follow. Kerry Group, rated Baa2/BBB+, has mandated Bank of America Merrill Lynch, HSBC, NatWest Markets and Rabobank to arrange a series of investor meetings in Europe starting on September 10. A 10-year euro benchmark may follow. Worldline, rated BBB by S&P, HAS picked BNP Paribas, JP Morgan and Natixis to arrange meetings concerning the potential issue of a senior unsecured benchmark with a five-year maturity. Wintershall Dea has selected Barclays, Bank of America Merrill Lynch, JP Morgan and Societe Generale for a series of meetings and a global investor call. A euro and/or US dollar issue may follow. The corporate is rated Baa2/BBB (Moody’s/Fitch). Dassault Systemes finished its roadshow last week with over 80 investors engaged. The issuer stated its intention of printing three, five, seven, and 10-year bonds as early as Monday.

Suez proved that going head-to-head with a jumbo trade from Danaher was no hurdle as the French waste management company printed one of the lowest yielding perpetual hybrids in the European market. With US conglomerate Danaher announcing on Monday its intention to issue a €6.25bn five-tranche bond on Tuesday, other would-be issuers had to decide whether to stand back or not. But with Suez seeking to issue a hybrid rather than a senior unsecured, leads reckoned there was no reason why the deal would struggle to gain traction. So it proved: Suez priced a €500m perpetual callable in September 2026 at a yield of 1.70% - the lowest for any conventional perpetual hybrid sold by a European corporate as records continue to tumble in credit markets. It is not the lowest yield for a European perpetual hybrid - that was set by fellow French utility and former parent Engie in January 2018 when it priced a €1bn 1.375% non-call April 2023 at 1.50%. But that was a green bond. The lowest yield set for any European corporate hybrid was by German utility EnBW a month ago through a dual-tranche offering. Those were dated hybrids - a €500m November 2079 non-call November 2024 printed at 1.125% and a €500m August 2079 non-call August 2027 at 1.625%. The Suez deal came a day after Rabobank achieved the tightest level for an AT1 issuance in the euro market after landing a €1.25bn perpetual non-call December 2026 at 3.25%. The deals show that interest for high-beta products is firmly intact, notwithstanding Bank of Ireland’s decision to pull a Tier 2 on Tuesday (see separate story). Corporates have been testing appetite for longer-dated bonds in recent weeks - the 30-year tenor, for example, has come back into favour - as the growth in negative-yielding debt cripples the ability of insurers and asset managers to meet their yield targets. Books on Suez peaked at more than €2bn as the bonds tightened from 2.125% area talk to guidance of 1.75%-1.875%. There was then a slight retrenchment to €1.9bn-plus as the bond launched at 1.70%.   NEGATIVE TENDER The new issue will finance a tender offer for Suez’s 3% €500m hybrid, which can be called on June 23 2020. Suez is offering to buy back the bonds at a yield of -0.30%. “Buying bonds back at a negative yield is extraordinary,” said a lead. While the bonds will be bought back above par, the opportunity to take out higher-coupon bonds and issue at historical lows is proving too good to resist for some companies. UK power distributor National Grid undertook a similar new issue and tender the previous week. As for investors, one additional incentive apart from the potential price on offer is that as Suez does not have an S&P rating - and it is only under S&P methodology that hybrids lose their equity credit if they are not called at the first opportunity to do so - there is a slight risk the bonds will not be redeemed next year, according to CreditSights. “But in mitigation Suez has shown a commitment to the hybrid asset class and we would regard any extension risk as minimal,” said the research firm. Citigroup and Societe Generale were global coordinators. They were joined as bookrunners by Deutsche Bank, MUFG and Santander. More hybrid supply came later in the week when Eurofins Scientific put out IPTs on Wednesday for a €300m no-grow perpetual non-call three at 3.375% area. The trade priced at a yield of 3%. The unrated bond will finance a tender offer for the company’s 7% perpetual callable on January 31 2020.

The first two deals to reopen the European high-yield primary market were met with a flood of demand from cash-rich investors last Monday. Debt sales from Double B credits Thyssenkrupp and Smurfit Kappa brought in €3bn and €3.9bn of orders, respectively (both pre-reconciliation). “There is a very strong technical in the high-yield market,” a source familiar with one of the deals said. “Big incomings from repayments and lack of available supply mean that demand for Double B credits will be very aggressive and deep bid.” Thyssenkrupp sailed through high-yield primary unbruised by recent profit warnings and a downgrade, thanks in part to a large initial premium on its new €1bn 3.5-year bond. The German industrials and steel company (Ba3/BB-/BB+, stable/developing/watch negative) approached investors with a benchmark 3.5-year bond. Initial price thoughts for the March 2023 note were mid-swaps plus 290bp area. Thyssenkrupp has an outstanding 1.375% March 2022 bond which was seen bid at 131bp over. “They’re definitely pricing this to move,” said one investor. “Thyssenkrupp is not a credit that is easy to love. But in this market, there doesn’t seem to be that much focus on operations. It’s more what the tenor is, and what the spread on offer is,” he said. The tactic worked. Books were first telegraphed at over €2bn. Interest had picked up to over €2.75bn by guidance, and books closed at around €3bn (pre-reconciliation). Demand allowed leads to cut spreads down to 255bp-260bp by guidance. The bond landed at the tight end of the range. Leads were pitching the 3.5-year tenor to pick up retail investor interest - as per the tenor, format and retail denominations, the investor and a source familiar said. Joint lead managers were Commerzbank, Citigroup, Credit Agricole, Deutsche Bank, Santander and UniCredit. Like the rest of the industrials sector, Thyssenkrupp has been through the mill recently. The company said in August that it would look at selling its prized elevator business after issuing its fourth profit warning under current boss Guido Kerkhoff. Thyssenkrupp’s was pushed further into junk shortly after, with S&P lowering it a notch to BB- (developing). The ratings agency said it would likely downgrade the company again if it was unable to dispose of its elevator business via an IPO. At the moment, the group is losing €2.7m euros of cash a day and will probably be kicked out of Germany’s blue-chip index next month, according to Reuters News. ANY YIELD IS HIGH YIELD Elsewhere in the market, Smurfit Kappa (Ba1/BB+/BB+) landed a €750m eight-year bond at a yield of 1.50%. Leads saw the note landing with a new issue premium of zero to 10bp, compared with Smurfit’s outstanding curve. The Irish corrugated packaging company has an outstanding 2.875% January 2026 bond which was seen by the investor at 1.25% on the offer side, and by a second source familiar at 1.16% on the bid side. However, bankers said that new issue premiums are hard to ascertain in a market where cash prices are being pushed so high and levels are swinging tighter thanks to investor demand for yield. Orders of €3.9bn allowed leads to cut the yield from an initial 2.00% area, and to upsize the bond by €250m from €500m. Interest came from high-yield and investment-grade accounts, according to a source familiar with the deal. Proceeds from the bond will repay Smurfit Kappa’s 2020 floating-rate note and its 3.25% June 2021 bond. While Smurfit is paying a 3.25% coupon, the 2021 bond is trading with a negative yield of -0.20% on the bid side, according to Tradeweb. “That’s part of the reason they wanted to take it out,” the second source familiar said. High-yield bankers said they are waiting to see whether more investment-grade investors will start dipping down into junk territory in order to pick up yield. “We hadn’t seen that pre-July,” said one high-yield banker. “But now we’re waiting to see with the massive rally in sovereigns and rates markets - are they going to