Insulet gives investors sugar-high

IFR 2299 7 September to 13 September 2019
3 min read
Stephen Lacey

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.