Morning Commentary: Bookbuilding for Sempra in process; China Lodging starts year on a high note

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 mandatories is driven by the dividend on Sempra Energy’s common shares, which is more than 3%, a market source said.

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.

The concurrent offering will make it easy for hedge buyers to put their positions in place, however the large dividend on the common stock may be a turn off, according to the source.

“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.”

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.

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 as the Shanghai-based hotel group’s American Depository Shares dropped 4.97% to $150.97.

The notes have come a long way since late November and early December when they were trading below par. However, they gained some upward momentum in the final trading sessions of the year to close 2017 at 109.944, according to Trace data.

© 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.