Morning Commentary: Fluor convertible preferreds eyed; equity markets show early gains

By Abigail W. Adams

Portland, Me., May 13 – The convertibles primary market continued to churn out deals as equity markets rebounded from three days of losses.

Fluor Corp. plans to price $450 million, or 450,000 shares, of par-of-$1,000 convertible preferred stock after the market close on Thursday.

Due to the unique call structure on the deal, sources debated whether the offering was a non-mandatory or mandatory convertible preferred.

Braemar Hotels & Resorts, Inc. is also on deck with a $50 million offering of five-year convertible notes.

The deal looked cheap. However, it was heard to be wall-crossed.

Fluor in focus

Fluor plans to price $450 million, or 450,000 shares, of par-of-$1,000 convertible preferred stock after the market close on Thursday with price talk for a dividend of 6% to 6.5% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

Due to the unique call structure, sources debated whether the deal was a mandatory or non-mandatory convertible preferred.

Some sources saw the deal as a “rare instance of a non-mandatory convertible preferred,” a source said.

The deal was reminiscent of the concluding line from a John Wayne movie – ‘I thought you were dead,’ the source said.

Another source saw the deal as a new type of mandatory due to its unique call structure with the deal only offering soft call protection.

The preferred stock is provisionally callable until May 20, 2024 subject to a 130% hurdle and with a cash make-whole payment.

It is then callable at 100% of the threshold appreciation premium.

The deal was heard to be in the market with assumptions of 500 basis points over Libor and a 30% vol.

Using those assumptions, the deal looked about 1 point cheap at the midpoint of talk.

Fluor’s convertible preferreds were considered credit positive for the company with proceeds to be used to reduce outstanding debt, Moody’s Investors Service said in a press release.

Braemar wall-crossed

Braemar Hotels plans to price $50 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 4% to 4.5% and an initial conversion premium of 22.5% to 27.5%, according to a market source.

Using assumptions of 800 bps over Libor and a 32% vol., the deal looked more than 7 points cheap at the midpoint of talk.

However, the small offering was wall-crossed, sources said.

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