onsemi, Southern Co. convertible offerings play to strong demand; PPL down; Lucid falls

By Abigail W. Adams

Portland, Me., Feb. 23 – The new issue pipeline in the convertible bond market 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 refinancing deals played to strong demand during book building with Southern Co. the second investment-grade rated company to tap the convertibles 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 volatile day for equities with indexes again wavering between gains and losses as markets continued to debate the Federal Reserve’s rate hike path following the release of the Federal Open Market Committee minute notes the previous session.

Equity indexes launched the session strong, sank into negative territory in intraday activity, but fought off losses to close the day with gains.

The Dow Jones industrial average closed Thursday up 109 points, or 0.33%, the S&P 500 index closed up 0.53%, the Nasdaq Composite index closed up 0.72% and the Russell 2000 index closed up 0.71%.

The secondary space remained active with $130 million in reported volume about one hour into the session and $558 million on the tape about one hour before the market close.

While the tone improved heading into the close, equity volatility and accounts selling to make room for the new paper pressured the space.

The midday turnaround in the market was a “headscratcher,” a source said. “People got nervous and started hitting bids.”

However, new paper remained the driver of activity in the space.

onsemi’s new offering sparked activity in its 0% convertible notes due 2027 with holders switching out of the old for the new.

PPL Capital Funding Inc.’s 2.875% convertible notes due 2028 (Baa1/BBB+) continued to dominate the tape with the notes giving back some gains their second day in the secondary space.

Outside of new paper, Lucid Group Inc.’s 1.25% convertible notes due 2026 crumbled in active trade following earnings.

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 offering played to strong demand during book building with allocations expected to be tight.

“ON might be a food fight,” a source said.

onsemi is a well-known name in the convertibles market and a strong BB credit.

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 with holders switching out of the old issue for the new, particularly outright accounts interested in balanced paper.

However, the 0% convertible notes were largely unchanged dollar-neutral in the activity, a source said.

The notes were off 2 to 3 points outright as stock wavered between gains and losses.

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

They were changing hands at 154.5 in the late afternoon.

There was $24 million in reported volume.

onsemi’s stock traded to a high of $79.91 and a low of $76.19 before closing at $78.39, a decrease of 0.22%.

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.

The deal played to strong demand and was heard to be 2x oversubscribed in the early afternoon.

PPL day two

PPL’s 2.875% convertible notes due 2028 gave back some gains their second day in the secondary space after a strong aftermarket debut.

The 2.875% notes were down about 1.25 points outright with stock in negative territory for the majority of the session.

The notes were trading at 100.5 versus a stock price of $27.57 in the late afternoon.

They contracted 0.5 point dollar-neutral, a source said.

The notes continued to dominate the tape with $123 million in reported volume.

PPL’s stock traded to a high of $27.92 and a low of $27.42 before closing at $27.86, up 0.54%.

The notes made strong gains on their aftermarket debut on Wednesday with the notes expanding 1.75 to 2 points dollar-neutral.

Lucid earnings

Lucid’s 1.25% convertible notes due 2026 crumbled in active trade after an earnings disappointment.

The 1.25% notes were off 6 points outright with stock down more than 12%.

The convertibles were changing hands at 60.5 versus a stock price of $8.20 in the late afternoon and contracted 3 points dollar-neutral.

The yield rose to 15.375%.

There was $19 million in reported volume.

Lucid’s stock traded to a low of $8.10 and a high of $8.89 before closing at $8.79, a decrease of 11.92%.

Stock sank after the EV manufacturer reported earnings.

Lucid reported fourth-quarter losses per share of 28 cents, which were in line with estimates, on revenue of $257.1 million versus the $273.59 million expected.

However, production guidance for 2023 was nearly 50% below analyst estimates with the company expecting to produce 10,000 to 14,000 vehicles versus the average analyst estimate for 21,800 vehicles.

Lucid’s 1.25% convertible notes soared 12 points to a 66-handle in late January on rumors the Saudi Public Investment Fund was eyeing a buyout of the company.

Prior to Thursday’s session, the notes were wavering between a 66- and a 67-handle.

Mentioned in this article:

Lucid Group Inc. Nasdaq: LCID

onsemi Nasdaq: ON

PPL Corp. NYSE: PPL

Southern Co. NYSE: SO

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