Morning Commentary: Southern Co., onsemi convertible notes fall below par on debut

By Abigail W. Adams

Portland, Me., Feb. 24 – The convertibles primary market capped the highest volume week of 2023 with two deals totaling $2.8 billion clearing the market.

onsemi, formerly known as ON Semiconductor Corp., priced an upsized $1.3 billion of six-year convertible notes and Southern Co. priced $1.5 billion of three-year convertible notes after the market close on Thursday.

The two deals bring the primary market’s weekly tally to $4.8 billion, more than double the amount that priced year to date leading into the Feb. 19 week.

The new paper played to heavy demand during bookbuilding with both deals oversubscribed, sources said.

However, they hit the secondary space on a rough day for equities with heavy selling following a hotter-than-expected Consumer Price Expenditure report.

The Dow Jones industrial average was down 467 points, or 1.39%, the S&P 500 index was down 1.62%, the Nasdaq Composite index was down 2.18% and the Russell 2000 index was down 1.53% shortly before 11 a.m. ET.

Both deals fell below par amid the heaviness in the market with Southern Co. contracting and onsemi expanding on hedge.

onsemi in demand

onsemi priced an upsized $1.3 billion of six-year convertible notes after the market close on Thursday at par at the rich end of talk with a coupon of 0.5% and an initial conversion premium of 32.5%.

Price talk was for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%.

The greenshoe was also upsized to $200 million.

The initial size of the offering was $1.1 billion with a greenshoe of $165 million.

The new paper struggled on an outright basis with the notes wrapped around par in premarket activity.

They were marked at 99.75 bid, 100.25 offered before the opening bell and continued to move lower with stock off more than 3% in early trading.

The notes were changing hands at 99 versus a stock price of $75.88 about one hour into the session.

However, they expanded 0.375 point dollar-neutral on the move down, a source said.

There was $73 million in reported volume.

onsemi’s stock was seen at $75.90, a decrease of 3.17%, shortly before 11 a.m. ET.

Southern Co. contracts

Southern Co. priced $1.5 billion of three-year convertible notes after the market close on Thursday at par at the midpoint of talk with a coupon of 3.875% and an initial conversion premium of 30%.

Price talk was for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The new paper struggled on an outright and dollar-neutral basis under the heavy market conditions early Friday.

The notes were marked at 99 bid, 99.375 offered in premarket activity.

They were changing hands at 99.375 versus a stock price of $64.11 about one hour into the session.

The notes contracted 0.75 point dollar-neutral, a source said.

There was $99 million in reported volume.

Southern Co.’s stock was trading at $63.91, a decrease of 1.30%, shortly before 11 a.m. ET.

The notes move on a light delta of about 37% due to the large coupon and the investment-grade rating of the company, a source said.

A heavier hedge would be dangerous given the company’s strong fundamentals and the possibility of a bull run in its stock.

“You’d get creamed on the way up,” a source said.

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