Southern Co., onsemi convertible notes struggle on debut; PPL Capital Funding lower

By Abigail W. Adams

Portland, Me., Feb. 24 – The convertibles primary market capped the highest volume week of 2023 with two deals totaling $2.8 billion clearing the market.

onsemi, formerly known as ON Semiconductor Corp., priced an upsized $1.3 billion of six-year convertible notes and Southern Co. priced $1.5 billion of three-year convertible notes (/BBB) after the market close on Thursday.

The two deals bring the primary market’s weekly tally to $4.8 billion, more than double the amount that priced year to date leading into the Feb. 19 week.

The new paper played to heavy demand during bookbuilding with both deals oversubscribed, sources said.

However, they hit the secondary space on a rough day for equities with heavy selling following a hotter-than-expected Consumer Price Expenditure report.

The Dow Jones industrial average closed Friday down 337 points, or 1.02%, the S&P 500 index closed down 1.05%, the Nasdaq Composite index closed down 1.69% and the Russell 2000 index closed down 0.92%.

There was $217 million in reported volume about one hour into the session and $906 million on the tape about one hour before the market close.

Both deals struggled on an outright basis and fell below par amid the heaviness in the market.

While onsemi performed well on hedge and expanded on the move down, Southern Co. contracted dollar-neutral.

PPL Capital Funding Inc.’s 2.875% convertible notes due 2028 (Baa1/BBB+) continued to move lower with the notes giving back all outright gains since pricing.

onsemi down outright

onsemi priced an upsized $1.3 billion of six-year convertible notes after the market close on Thursday at par at the rich end of talk with a coupon of 0.5% and an initial conversion premium of 32.5%.

Price talk was for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%.

The greenshoe was also upsized to $200 million.

The initial size of the offering was $1.1 billion with a greenshoe of $165 million.

The new paper struggled on an outright basis but held up well on swap.

The notes were marked at 99.75 bid, 100.25 offered before the opening bell and continued to move lower in early trading.

The notes were changing hands at 99 versus a stock price of $75.88 about one hour into the session.

However, the notes pared their outright losses as stock gained strength late in the session.

They were trading at 99.875 versus a stock price of $76.15 in the late afternoon.

They expanded 0.75 point dollar-neutral, a source said.

There was $283 million in reported volume.

onsemi’s stock traded to a high of $77.12 and a low of $75.52 before closing at $76.28, a decrease of 2.69%.

Southern Co. contracts

Southern Co. priced $1.5 billion of three-year convertible notes after the market close on Thursday at par at the midpoint of talk with a coupon of 3.875% and an initial conversion premium of 30%.

Price talk was for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The new paper struggled on an outright and dollar-neutral basis under the heavy market conditions on Friday.

The notes were marked at 99 bid, 99.375 offered in premarket activity.

They were changing hands at 99.375 versus a stock price of $64.11 about one hour into the session.

The notes were seen at 99.5 versus a stock price of $64.48 later in the session.

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

There was $180 million in reported volume.

Southern Co.’s stock traded to a high of $64.65 and a low of $63.71 before closing at $64.56, down 0.29%.

The poor performance of the notes was a surprise given their investment-grade rating.

However, the market may be having digestion issues with PPL pricing $900 million of investment-grade rated convertible notes just two days prior.

PPL carries a higher credit rating and is also a utility company.

The 3.875% notes move on a light delta of about 37% due to the large coupon and the investment-grade rating of the company, a source said.

A heavier hedge would be dangerous given the company’s strong fundamentals and the possibility of a bull run in its stock.

“You’d get creamed on the way up,” a source said.

However, the large coupon provides plenty of downside protection, the source said.

PPL lower

PPL’s 2.875% convertible notes due 2028 continued to move lower alongside stock with the notes giving back all outright gains since its strong aftermarket debut on Wednesday.

The notes were off 0.5 point with stock down almost 1% in intraday activity.

They were trading just shy of par versus a stock price of $27.49 in the late afternoon.

There was $28 million in reported volume.

PPL’s stock traded to a high of $27.80 and a low of $27.40 before closing the day at $27.69, a decrease of 0.61%.

The notes rose 2 points outright and dollar-neutral on their aftermarket debut but have come in over the past two sessions.

Mentioned in this article:

onsemi Nasdaq: ON

PPL Corp. NYSE: PPL

Southern Co. NYSE: SO

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