Morning Commentary: Federal Realty’s offering of exchangeable notes in focus early

By Abigail W. Adams

Portland, Me., Jan. 8 – The convertibles primary market hit the ground running on Monday with one new offering on deck.

The deal is the first investment-grade offering of the year, a trend that began in 2023 and promises to continue.

Federal Realty OP LP plans to price $400 million of five-year notes exchangeable for Federal Realty Investment Trust’s stock (expected Baa1/BBB+) after the market close on Monday with price talk for a coupon of 3.25% to 3.75% and an initial exchange premium of 20% to 25%.

The deal was heard to be in the market with assumptions of 175 basis points over SOFR and a 22% vol.

Using those assumptions, the deal looked 1 point to 1.75 points cheap at the midpoint of talk, sources said.

The deal did not look fantastic in terms of cheapness.

However, investment-grade issues are still able to command better pricing due to the quality of their credit.

And Federal Realty is a great company, a source said.

While the influx of low vol. investment-grade paper in 2023 was met with low enthusiasm, the continued march of high-grade names to the convertibles market remains a positive for the asset class.

High-grade convertible issuance has largely been concentrated in utility companies and REITs.

However, the hope is for the sectors to broaden with high-grade tech, industrial and other names to look to the convertibles market for their financing needs, a source said.

Meanwhile, the secondary space was quiet on a mixed morning for equities with the tech heavy Nasdaq outperforming after heavy selling the previous week.

The Dow Jones industrial average was down 46 points, or 0.12%, the S&P 500 index was up 0.51%, the Nasdaq Composite index was up 1.13% and the Russell 2000 index was up 0.46% shortly before 11 a.m. ET.

There was $36 million in reported volume about one hour into the session with no name seeing concentrated trading activity.

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