Morning Commentary: onsemi, Southern Co. convertible notes offerings eyed in primary

By Abigail W. Adams

Portland, Me., Feb. 23 – The new issue pipeline the convertible bond market has long anticipated remained in full force on Thursday with the primary market slated to price another $2.6 billion over two deals after the market close.

onsemi, formerly known as ON Semiconductor Corp., plans to price $1.1 billion of six-year convertible notes and Southern Co. plans to price $1.5 billion of three-year convertible notes.

The deals are refinancings with Southern Co. the second investment-grade rated company to tap the convertible market over the course of the week.

“That is a very good sign for the market,” a source said.

The new deals were in the works on a green start for equities as the rate concerns that pressured the market over the past two weeks were temporarily assuaged by the Federal Open Market Committee minute notes, which reflected near unanimous support for a slower pace of rate hikes.

The Dow Jones industrial average was up 63 points, or 0.19%, the S&P 500 index was up 0.38%, the Nasdaq Composite index was up 0.35% and the Russell 2000 index was up 0.50% shortly before 11 a.m. ET.

The secondary space remained active with $130 million in reported volume about one hour into the session.

New paper remained the driving force of trading activity with onsemi’s new offering sparking activity in its 0% convertible notes due 2027.

onsemi eyed

onsemi plans to price $1.1 billion of six-year convertible notes after the market close on Thursday with price talk for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%.

The deal was in the market with assumptions of a 275 basis points credit spread and a 42% vol., according to a market source.

Using those assumptions, the deal looked 1.32 points cheap at the midpoint of talk, a source said.

The deal is coming as a refinancing with proceeds to be used to repay the outstanding debt under the company’s term loan B facility.

The new offering sparked activity in the company’s 0% convertible notes due 2027.

The notes were off 1.5 points outright as stock wavered between gains and losses.

The notes were changing hands at 156.375 versus a stock price of $78.49 early in the session.

There was $12 million in reported volume.

onsemi’s stock was seen at $77.28, a decrease of 1.73%, shortly before 11 a.m. ET.

Southern Co. on tap

Southern Co. plans to price $1.5 billion of three-year convertible notes after the market close on Thursday with price talk for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The deal was heard to be in the market with assumptions of a 75 bps credit spread and a 21% vol., according to a market source.

Using those assumptions, sources pegged the deal as fair value to 0.75 point cheap at the midpoint of talk.

The deal was coming richer than the majority of new issuance to price in 2023.

However, the duration was short and the utility company is investment grade.

“We have not had a lot of IG credits issuing in many years. There is going to be very good demand,” a source said.

While the company is a strong credit, the coupon range is high to compensate for the large dividend with a common stock yield of 4.08%.

The company has paid a dividend of 68 cents for the past four quarters.

The convertible notes offering carries dividend protection above 70 cents per quarter.

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