Americas Structured Equity Issue: Twitter's US$1.15bn six-year convertible bond

Twitter reacted with lightning speed to word that it would be added to the S&P 500 Index. From a standing start, it had raised US$1.15bn from a six-year convertible bond within 48 hours.

S&P Dow Jones Indices alerted investors after the close on Monday, June 4 that Twitter would be added ahead of the market open the following Thursday.

“We began the process of execution [after the close on Monday], putting the documentation in place, thinking about size, structure and potential pricing outcomes,” said Twitter CFO Ned Segal. “That preparation didn’t bind us but did put us in a position to bring a proposal to the board early Tuesday morning.”

The conversation between Segal (a long-time Goldman banker), Michael Voris, in the structured equity origination team at Goldman Sachs, and Goldman’s Americas ECM head David Ludwig centred on the difficulties of executing a CB on a compressed timeline. Would Twitter’s board sign-off on such a large transaction? And would principal auditor PwC be able to provide comfort on Twitter’s pro forma financial results?

Twitter sold US$1.8bn of CBs in 2014 in what was a landmark transaction that came less than a year after its IPO. That documentation could be used as a template for a new CB, Voris said.

Twitter’s board gave the go-ahead on the Tuesday and PwC provided comfort later that day, clearing the way for the underwriters to market the CB on Wednesday.

Goldman Sachs, Morgan Stanley and JP Morgan priced the CB at a coupon of just 0.25% and conversion premium of 42.5%, toward the aggressive ends of talk and among the most aggressive coupon/premium pairings of any US CB sold in 2018.

There are obvious benefits to selling stock alongside an index inclusion. Yet, despite a technical lift from index-huggers, a CB simultaneous to S&P 500 entry is rare, having only previously been completed by Host Hotels in 2005, Boston Properties in 2006 and Dish Networks in 2016.

Twitter shares rose 0.8% on the one-day marketing to US$40.10, a three-year high, on top of a 5.1% gain on Tuesday on the inclusion announcement and ahead of the CB launch.

Much of that buying was either speculative or purely technical.

“There is some pre-positioning that happens [by index trackers],” said Voris. “But most of that buying is programme trading that happens at the close [on Wednesday]”.

Twitter did purchase a call spread that allowed the counterparty bank to hedge to arbitrage accounts buying the bonds and offset dilution consideration from the CB to share prices above US$80.20, a 100% premium to the reference price.

“There are very few companies that would have been able to move this quickly,” said Voris. “To make the call within a couple hours is really unprecedented.”