Morning Commentary: Nikola convertible placement eyed; Southern Co. notes active early

By Abigail W. Adams

Portland, Me., Aug. 21 – The convertibles primary market is expected to slow its pace heading into the final two weeks of August although it will not cease operations completely with some offerings still in its sleeves.

While the offering was more of a private placement, Nikola Corp.’s capital raise of up to $325 million in one-year convertible notes piqued market players’ interest for its unique structure.

The company directly placed $125 million of the notes, which mature in one year, with the option to sell an additional $200 million of the notes in the next 18 months, according to an 8-K filing with the Securities and Exchange Commission.

The convertible notes will be issued at par and bear interest of 5%, which will increase to 12.5% in the event of a default.

The conversion price will be the lower of either the reference share price of $2.94 or the greater of the bond floor of 38 cents or the VWAP of stock on the conversion date, the date preceding the application conversion date or 95% of the VWAP for the three trading days proceeding the conversion date.

“They must have really needed money,” a source said of the offering.

The placement was most likely the result of an anchor order from the company’s largest shareholders.

Nikola’s common stock purchase agreement with Tumim Stone Capital LLC was terminated in order to complete the requirements of the offering.

Tumim was most likely involved in the placement with the stock purchase agreement and convertible note placement an either/or scenario, a source said.

While the unique structure of the placement had market players talking, the deal is not expected to have any impact on the broader market.

However, one or two more wall-crossed deals are expected before the convertibles primary market goes on hiatus until after Labor Day.

Meanwhile, the secondary space saw a quiet start to the session with equity markets mixed.

The Dow Jones industrial average was down 165 points, or 0.48%, the S&P 500 index was up 0.02%, the Nasdaq Composite index was up 0.45% and the Russell 2000 index was down 0.21% shortly before 11 a.m. ET.

There was $59 million in reported volume about one hour into the session with few names seeing concentrated trading activity.

Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) were the most actively traded issue early in the session although with little price movement.

The 3.875% notes were changing hands at 98.25 versus a stock price of $67.45 early in the session, according to a market source.

There was $10 million in reported volume.

Southern Co.’s stock was trading at $67.43, a decrease of 0.56%, shortly before 11 a.m. ET.

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