Abigail W. Adams
Portland, Me., Jan. 3 – Bookbuilding is in process for Sempra Energy’s planned offering of $1.5 billion in series A mandatory convertible preferred stock due 2021, which is expected to price at par of $100 after the market close Thursday.
With price talk for a dividend of 6% to 6.5% and an initial conversion premium of 17.5% to 22.5%, the mandatory might look attractive at first glance but the high dividend on the common stock may be a deterrent to hedge buyers, a market source said.
In the existing convertibles space, China Lodging Group Ltd.’s 0.375% convertible notes due 2022 are expanding in the New Year after struggling to remain above par just one month ago.
Intel Corp.’s 3.25% convertible notes due 2039 stumbled as rival chipmaker Advanced Micro Devices Inc.’s 2.125% convertible notes due 2026 soared after news broke about a design flaw and security vulnerability in Intel chips.
Micron Technology Inc.’s 3% convertible notes due 2043 also benefited from the news with the notes climbing another 4 points after a more than 6 point climb during Tuesday’s session.
Sempra in waiting
Market sources predicted a meaningful uptick in new issuance in 2018 and the year kicked off with Sempra Energy’s announcement of a planned offering of $1.5 billion in series A mandatory convertible preferred stock due 2021.
Morgan Stanley, RBC Capital Markets and Barclays are joint bookrunners for the registered offering, which is being made concurrently with an offering of $2.5 billion of common stock, according to a company release.
Price talk is for a dividend of 6% to 6.5% and an initial conversion premium of 17.5% to 22.5%, according to a market source. The high dividend on the mandatories is driven by the dividend on Sempra Energy’s common shares, which is more than 3%, a market source said.
While the concurrent stock offering will make it easy for hedge buyers to put their positions in place, the large dividend on the common stock may be a turn off, the source said.
“With the big common dividend, hedge funds may not find this mandatory attractive since they have to pay out the common dividend on their short positions,” the source said.
The deal may appeal more to outright buyers attracted to the yield but with mandatory convertible preferred stock there is no guarantee of a return on the initial investment, the source said.
“The yield on a mandatory is really a falsehood,” the source said. “You have no assurance of getting your initial investment back and without that assurance yield is pretty meaningless.”
Sempra stock ended Wednesday at $108.14, an increase of 2.65%.
China Lodging
China Lodging’s 0.375% convertible notes due 2022 are now more than 10 points above par after struggling to reach par just one month ago.
The 0.375% notes, which priced in late October, climbed 4 points to 113 on Tuesday, as the company’s underlying equity soared 10% to close Tuesday at 158.86.
The notes dropped to 111 in early trading during Wednesday’s session and remained stagnant for the remainder of the day as the equity lost steam.
The Shanghai-based hotel group’s American Depository Shares closed the day at $154.78, a decrease of 2.57%.
The notes have come a long way since late November and early December when they were trading below par. The notes dipped to a low of 94 in late November but have since steadily climbed upwards.
Their upward momentum increased in the final trading sessions of the year and China Lodging closed 2017 at 109.944, according to Trace data.
The 0.375% convertible notes were one of the top performers of BofA ML’s VG00 Global Index and VASI Asia Index for the month of December, returning 13.89%, according to a market source.
Intel’s loss, AMD’s gain
As Intel’s 3.25% convertible notes plunged, Advanced Micro’s 2.125% notes soared after news broke about a design flaw and security vulnerability impacting Intel processing systems.
The notes plunged to a low of 210.41 and reached a high of 217.703 before ending Wednesday’s session at 216.75, according to Trace data. The notes closed on Tuesday at 224.
Intel stock was faced with its largest single-day loss since 2016 on Wednesday. The stock was down around 6% at various points in the day but regained ground after Intel released a statement saying the design flaw was not limited to Intel products.
Intel stock closed the session at $45.26, a decrease of 3.39%.
Rival chipmaker AMD’s 2.125% convertible notes climbed another 7 points during Wednesday’s session after rising about 7 points on Tuesday. The notes reached a high of 169.3 before closing the day at a low of 164.24, according to Trace data.
AMD’s stock also continued its upward climb on Wednesday, ending the session at $11.55, an increase of 5.19%. AMD stock was up 6.81% at market close Tuesday.
Micron Technology’s 3% convertible notes also benefited from Intel’s loss. The notes traded up to 156 at market close Wednesday, an almost 4 point gain from Tuesday’s closing trade. The notes were also upward bound on Tuesday, climbing more than 6 points as the semiconductor company’s stock rallied.
Micron Technology stock ended Wednesday at $44.98, an increase of 3%.
The Register, an on-line tech news website, broke the story about the design flaw and security vulnerability, which is believed to impact Intel processors developed in the past decade, after the market close Tuesday.
The article quoted an e-mail from an Advanced Micro software engineer, which stated Advanced Micro’s processors were not affected.
Intel has since disputed the report. “Recent reports that these exploits are caused by a ‘bug’ or a ‘flaw’ and are unique to Intel products are incorrect,” the company said in a release. “Based on the analysis to date, many types of computing devices – with many different vendors’ processors and operating systems – are susceptible to these exploits.”
Mentioned in this article:
| Sempra Energy: | NYSE: SRE
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| China Lodging Group Ltd.: | Nasdaq: HTHT
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| Intel Corp.: | Nasdaq: INTC
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| Advanced Micro Devices Inc.: | Nasdaq: AMD
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| Micron Technology Inc.: | Nasdaq: MU
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