Shift4 convertibles offering eyed, existing notes contract; Southwest Airlines active

By Abigail W. Adams

Portland, Me., July 21 – The convertibles primary market returned to action with the first new deal in more than three weeks set to price after the market close.

Shift4 Payments Inc. plans to price $500 million of six-year convertible notes after the market close on Wednesday.

The deal looked cheap based on underwriters’ assumptions, sources said.

Shift4 is a repeat issuer of convertible notes. While the company’s latest offering was in the works, its 0% convertible notes due 2025 were active with the notes coming in on an outright and dollar-neutral basis.

Meanwhile, the secondary space continued to firm on Wednesday on another strong day for equities.

The Dow Jones industrial average closed the day up 286 points, or 0.83%, the S&P 500 index closed the day up 0.82%, the Nasdaq Composite finished the day up 0.92% and the Russell 2000 ended the day up 1.81%.

The convertibles market was up about 0.25 point on a dollar-neutral basis, erasing its losses from Monday’s sell-off, a source said.

There was $122 million in reported volume about one hour into the session and $481 million in reported volume about one hour before the market close.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) dominated the tape with the notes gaining on an outright basis alongside stock on the eve of the company’s earnings report.

Shift4 eyed

Shift4 plans to price $500 million of six-year convertible notes after the market close on Wednesday with price talk for a coupon of 0.5% to 1% and an initial conversion premium of 37.5% to 42.5%, according to a market source.

The deal was in the market with assumptions of 350 basis points over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked 1.85 points cheap at the midpoint of talk.

However, with a higher vol. of 45%, the deal looked 3.5 points cheap, another source said.

The deal was pricing concurrently with a secondary offering of 7 million shares.

Shift4’s stock was getting “clocked” on the heels of the new offering, a source said.

The decline in stock was almost a guarantee that there will be a bounce in the notes on their debut on Thursday, the source said.

The payment processing company is a repeat issuer of convertible notes.

While Shift4’s latest offering was in the works, its 0% convertible notes due 2025 were coming in on an outright and dollar-neutral basis.

The 0% notes dropped 6.5 points outright with stock off more than 6%.

They were changing hands at 125.5 versus a stock price of $16.5 million in the late afternoon.

The notes contracted about 0.75 point dollar-neutral, a source said.

Shift4’s stock traded to a high of $86.87 and a low of $83.50 before closing the day at $86.08, a decrease of 6.16%.

In December 2020, the payment processing company priced a $690 million issue of the 0% convertible notes due 2025.

With market conditions hot following the 2020 federal election, the company was able to tap into the attractive terms that were becoming commonplace in the convertibles market at the time.

The 2025 notes were initially talked with a coupon of 0.25% to 0.75% and an initial conversion premium of 37.5% to 42.5%.

However, talk tightened to a coupon of 0% to 0.25% and an initial conversion premium of 42.5% to 45% – a common occurrence in the market at the time.

Southwest active

Southwest’s 1.25% convertible notes due 2025 dominated the tape on Wednesday with the notes posting gains on an outright basis alongside stock.

The 1.25% convertible notes were up about 4 points outright as stock gained more than 3%.

The 1.25% notes were changing hands at 152 in the late afternoon.

There was more than $58 million in reported volume.

Southwest’s stock traded to a low of $52.08 and a high of $53.52 before closing the day at $53.13, an increase of 3.31%.

The convertible notes were active on the eve of the company’s earnings report, which is scheduled to be released prior to the market open on Thursday.

United Airlines released earnings which beat expectations on Wednesday, setting a positive tone for the industry.

Mentioned in this article:

Shift4 Payments Inc. NYSE: FOUR

Southwest Airlines Co. NYSE: LUV

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