Convertible buyers active on Fed day; Southern Co., Alliant improve; onsemi gains

By Abigail W. Adams

Portland, Me., March 22 – It was a volatile day in the convertibles secondary space as the event the market had been waiting for transpired – the Federal Open Market Committee revealed its path forward in the fight against inflation in light of the recent banking crisis.

The committee announced a widely anticipated 25 basis point rate increase, which lifted the Federal Funds target range to 4.75% to 5%.

It was a substantial reduction from the 50 bps rate increase policy makers had been prepared for prior to the rapid collapse of Silicon Valley Bank and instability in the banking sector.

The initial market response to the announcement was positive with equities returning to the highs of the day during chair Jerome Powell’s press conference.

However, selling pressure took hold into the close with equity indexes ending Wednesday’s session deep in the red.

There were dovish overtones to the Fed announcement with policy makers dropping the phrase “ongoing increases” for the more ambiguous “some additional policy firming may be appropriate,” with Powell highlighting the words “some” and “may” during his press conference.

However, the dot plot plan was little changed in light of the banking crisis with a near consensus that the Federal Funds rate will need to rise to at least 5.1% and hold there through December.

The dot plot projections were in stark contrast to a market that has already priced in rate cuts by the year’s end.

The Dow Jones industrial average closed Wednesday down 530 points, or 1.63%, the S&P 500 index closed down 1.65%, the Nasdaq Composite index closed down 1.6% and the Russell 2000 index closed down 2.83% shortly before 11 a.m. ET.

While selling pressure took hold into the close, buyers were active in the convertibles secondary space leading into the afternoon press conference.

“There was a lot of money being put to work by outright accounts,” a source said.

There was $76 million in reported volume about one hour into the session and $533 million on the tape about one hour before the market close.

Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) were the most actively traded issue in the secondary space with the notes continuing to hold above par.

Alliant Energy Corp.’s 3.875% convertible notes due 2026 (BBB+) also saw heavy volume with the notes lower outright but strong on hedge.

onsemi’s 0.5% convertible notes due 2029 continued to post gains with buyers chasing the paper.

Upwork Inc.’s 0.25% convertible notes due 2026 saw some action after the company announced it was repurchasing a portion of the outstanding amount.

Investment-grade trades

Investment-grade convertible notes remained the main drivers of trading activity on Wednesday with buyers active in the space heading into the Fed’s afternoon announcement.

Southern Co.’s 3.875% convertible notes due 2025 were the most actively traded issue of the session with the notes continuing to hold above par.

The 3.875% notes were changing hands at 100.25 versus a stock price of $67.87 in the late afternoon, according to a market source.

There was $74 million in reported volume.

Southern Co.’s stock traded to a low of $66.70 and a high of $68.18 before closing at $66.71, a decrease of 0.63%.

While Southern Co.’s 3.875% convertible notes have recovered outright after a sloppy start in the secondary space, the notes remain contracted about 0.75 point dollar-neutral since the $1.5 billion issue priced at par on Feb. 23.

Alliant Energy’s 3.875% convertible notes due 2026 were lower outright although the notes were strong on hedge.

The 3.875% notes were seen at 101 versus a stock price of $51.56 in the late afternoon.

There was $22 million in reported volume.

Alliant’s stock traded to a high of $52 and a low of $50.63 before closing at $50.65, down 2.61%.

While Alliant’s 3.875% convertible notes also saw a sloppy start in the aftermarket after the $575 million issue priced at par on Feb. 27, the notes have been the outperformers of the IG deals to price in February.

The 3.875% notes have expanded about 1.25 points dollar-neutral since pricing, a source said.

onsemi gains continue

onsemi’s 0.5% convertible notes due 2029 continued to gain in heavy volume with buyers chasing the paper, a source said.

The 0.5% convertible notes added another 0.375 point outright with stock flat for the majority of the session before selling pressure dragged it down into the close.

The notes were trading at 103.625 versus a stock price of $81.90 in the late afternoon, according to a market source.

There was $14 million in reported volume.

onsemi’s stock traded to a high of $82.39 and a low of $78.41 before closing at $78.82, a decrease of 3.11%.

Upwork repurchases

Upwork’s 0.25% convertible notes due 2026 saw some action on Wednesday after the company announced a repurchase of the notes.

Upwork announced that it would repurchase $196.8 million in principal of the 0.25% notes for an estimated amount of $157 million in privately negotiated transactions, according to a company press release.

The repurchase price will be based on the average daily VWAP over a two-day trading period beginning on Wednesday.

The 0.25% notes saw several round-lot prints in the 77 to 77.125 range early in the session and some small odd-lot trades in the low 80s, a source said.

Upwork’s stock traded to a low of $10.66 and a high of $11.06 before closing at $10.69, up 0.19%.

Hedge funds account for two of the top three holders of Upwork’s convertible notes, a source said.

However, the top 10 holders are a more balanced mix of hedge and outright accounts.

Mentioned in this article:

Alliant Energy Corp. Nasdaq: LNT

onsemi Nasdaq: ON

Southern Co. NYSE: SO

Upwork Inc. Nasdaq: UPWK

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