New Issue Update: Brocade Communications Systems (BRCD) $500 Million 1.375% Convertible Senior Notes of 1/1/2020

As we expected in a previous note, the new Brocade convertible has strongly outperformed its prosaic initial HOCS rating. Our initial overall score of 54, based on the midpoint of the price talk, became a 52 on the final pricing at the rich end.  The bond ranked very well for safety (72) but poorly for growth (42) based on the final pricing and the company’s static revenues of recent years.

With this morning’s unsurprising richening (the credit is, after all, only a notch away from the promised land of investment grade), the HOCS ratings are correspondingly lower.   Using indicated levels of 103 ¾ on the new convertible and $12 on the stock, the HOCS slash line drops sharply to 41 overall/33 growth/58 safety.  We won’t be seeing Brocade on the HOCS 20 any time soon, but it’s a leading candidate for the Ugly 20 if the stock should rally to the mid-teens.

We understand the demand for this issue—a very solid company, an excellent credit, a well-known name in convertible land. Unfortunately, the bonds simply don’t offer much value at this stage.