Morning Commentary: Stem convertible notes offering emerges; onsemi notes active early

By Abigail W. Adams

Portland, Me., March 29 – The convertibles primary market broke its silence after more than one week with no issuance with a new offering on deck.

Stem Inc. plans to price $175 million of seven-year green convertible notes after the market close on Wednesday.

While the offering modeled cheap based on underwriters’ assumptions, its real value will be in the buyback of its outstanding 0.5% convertible notes due 2028, sources said.

However, the depressed price of the outstanding 0.5% convertible notes also made Stem’s latest offering unattractive, a source said.

The new deal launched on a strong day for equities with positive earnings boosting market sentiment ahead of a heavy slate of macro data.

The Dow Jones industrial average was up 174 points, or 0.54%, the S&P 500 index was up 0.89%, the Nasdaq Composite index was up 1.12% and the Russell 2000 index was up 0.85% shortly before 11 a.m. ET.

While the market tone improved, the convertibles secondary space remained quiet with $67 million in reported volume.

onsemi’s 0.5% convertible notes due 2029 were off to a strong start in active trade with the notes returning to a 101-handle after breaking below par the previous session.

Stem eyed

Stem plans to price $175 million of seven-year green convertible notes after the market close on Wednesday with price talk for a coupon of 3.75% to 4.25% and an initial conversion premium of 27.5% to 32.5%.

The deal was heard to be in the market with assumptions of 1,000 bps over SOFR and a 45% vol., according to a market source.

Using those assumptions, sources pegged the offering 0.75 point cheap to 1.5 points cheap at the midpoint of talk.

The deal is coming as a refinancing with proceeds to be used to repurchase a portion of the company’s 0.5% green convertible notes due 2028 in privately negotiated transactions.

The value in the offering was most likely in the repurchase of the 0.5% notes, which have been trading on a 57-handle, a source said.

The 0.5% notes currently have $460 million outstanding.

Their depressed price made Stem’s new offering less attractive with the outstanding notes carrying a yield to maturity of about 10.67%.

“This is a pure vol. play,” a source said. “No one would buy it for the coupon.”

The new deal will mostly appeal to hedge funds.

However, outright accounts may be interested in the notes for the “barbell effect,” a source said.

While the 0.5% notes are trading at their bond floor, the new notes will allow some participation in any equity upside – a strategy one source called a “barbell” investment.

The top three holders of the 0.5% convertible notes are outright accounts.

The new deal launched on a strong day for equities with positive earnings boosting market sentiment ahead of a heavy slate of macro data.

onsemi rebounds

onsemi’s 0.5% convertible notes due 2029 were off to a strong start in active trade with the notes rebounding strongly after breaking below par the previous session.

The 0.5% notes gained 1.5 points outright with the notes returning to a 101-handle.

The notes were changing hands at 101.625 versus a stock price of $77.87 early in the session, according to a market source.

There was $10 million in reported volume.

onsemi’s stock was trading at $77.41, an increase of 1.18%, shortly before 11 a.m. ET.

The 0.5% notes dropped below par on Tuesday with stock under pressure alongside the broader semiconductor sector.

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