Morning Commentary: Chewy exchangeables on tap; Southwest Airlines drops outright

By Abigail W. Adams

Portland, Me., May 4 – The active pipeline of new deal activity continued on Monday with the first mandatory convertible on deck since volatility roiled capital markets in March.

2020 Mandatory Exchangeable Trust, a newly organized subsidiary of PetSmart Inc., plans to price $600 million mandatory three-year exchangeable trust securities after the market close on Monday with price talk for a yield of 6.25% to 6.75% and a threshold appreciation premium of 17.5% to 22.5%, according to a market source.

The securities are exchangeable into Chewy Inc. common stock.

PetSmart is a well-known name in the high-yield and leveraged loan markets.

The specialty pet retailer’s transfer of a portion of subsidiary Chewy.com’s equity out of the reach of creditors in 2018 was a highly contentious move.

However, the private equity transfer was not as aggressive as anticipated and Chewy.com’s IPO in 2019 further helped the outlook for PetSmart’s high-yield bonds.

Proceeds from the offering will go to PetSmart and be used to pay off debt.

Meanwhile, as market players eyed the new deal in the pipeline, the secondary space was off to a slow start on a soft day for the market on Monday.

There was about $60 million in reported volume about one hour into the session.

Southwest Airlines Co.’s 1.25% convertible notes due 2025 remained in focus with the notes coming in on an outright basis as stock dropped.

The notes were down about 3 points outright with stock off as much as 7% early in the session.

The notes were changing hands between 102.75 and 103.25 in high-volume activity.

The 1.25% notes accounted for nearly half of the total reported volume early in the session with almost $30 million on the tape.

Southwest stock traded down to $26.94, a decrease of 7.77%, shortly before 11 a.m. ET.

Stock was taking a hit after Warren Buffet announced that Berkshire Hathaway had exited its position in U.S. airlines, including Southwest.

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