Morning Commentary: Duke Energy convertible notes eyed; pricing of IG issuance cheapens

By Abigail W. Adams

Portland, Me., April 3 – The convertible primary market launched the first week of April with another outsized offering from an investment-grade issuer.

Duke Energy Corp. plans to price $1.5 billion of three-year convertible notes (Baa2/BBB) after the market close on Monday.

The deal modeled significantly cheaper than the three previous investment-grade issues from utility companies, which priced in late February, a reflection of changing market conditions and the large size of the offering.

While the previous wave of investment-grade paper struggled in the aftermarket before catching a bid over the past two weeks, Duke Energy is expected to do well as credit markets continue to rip after a choppy March.

Duke eyed

Duke Energy plans to price $1.5 billion of three-year convertible notes (Baa2/BBB) after the market close on Monday with price talk for a coupon of 3.875% to 4.375% and an initial conversion premium of 25% to 30%, according to a market source.

The deal was heard to be in the market with assumptions of 125 basis points over SOFR and a 19% vol.

Using those assumptions, the deal looked about 1.43 points cheap at the midpoint of talk, a source said.

Other sources pegged assumptions as 125 bps over SOFR with a 21% vol., which lifted the cheapness of the deal to 2.3 points.

The convertible notes offering is the fourth one of the year to come from an investment-grade utility company.

The deal was significantly cheaper than its predecessors, which priced in late February, a reflection of changing market conditions and the large size of the offering.

However, Duke’s offering was well priced, a source said.

“This is good for what you have here,” a source said.

With the vol. low, the deal will mostly be a yield play and the yield for a three-year duration is in line with the broader market, the source said.

The offering seemed to be following the same playbook as the three previous IG issues from utilities, which initially struggled in the aftermarket before catching a bid as credit markets recovered over the past two weeks.

However, the credit is strong, the sector is defensive, and with credit markets continuing their strong uptrend, the deal is expected to do well.

Price change

Duke’s new convertible offering is being marketed with cheaper pricing than the previous three investment-grade issues from utility companies, which had shaky starts in the secondary.

The oversaturation of investment-grade issuance and the shockwaves from Silicon Valley Bank’s collapse in early March pressured those notes, although they have been on a strong uptrend over the past two weeks.

Southern Co. marketed its $1.725 billion issue of 3.875% convertible notes due 2025 (Baa2/BBB) with assumptions of a 75 bps credit spread and a 21% vol.

The deal modeled about 0.75 point cheap at the midpoint of price talk for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The notes immediately sank below par on debut and were trading on a 98-handle for the first half of March but have been on a strong uptrend over the past two weeks.

The notes were active early Monday and trading at 100.875 versus a stock price of $68.80 early in the session, a source said.

There was $16.5 million in reported volume.

PPL Corp., the fist investment-grade deal of the year, marketed its $1 billion issue of 2.875% exchangeable notes due 2028 (Baa1/BBB+) with assumptions of a 125 bps credit spread and a 21% vol., which modeled 1.25 points cheap at the midpoint of initial price talk for a coupon of 3% to 3.5% and an initial exchange premium of 20% to 25%.

Price talk for PPL’s offering was tightened to 2.875% to 3.125% and an initial exchange premium of 22.5%.

The notes were initially strong on their aftermarket debut on Feb. 22 but quickly dropped below par amid the wave of investment-grade issuance.

The notes have been the underperformer of the IG issuance of 2023 and traded as low as a 96-handle following Silicon Valley Bank’s collapse.

They popped above par for the first time since their initial days in the market late last week.

Alliant Energy Corp.’s $575 million issue of 3.875% convertible notes due 2026 (BBB+), with assumptions of 100 bps over SOFR and a 22% vol., looked about 0.44 point cheap at the midpoint of price talk for a coupon of 3.375% to 3.875% and an initial conversion premium of 25% to 30%.

The notes saw a heavy aftermarket debut on Feb. 27 and were training on a 99-handle until mid-March.

The notes have been the best performers of the recent IG issues and were changing hands at 103 versus a stock price of $53.40 early in the Monday session.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.