Duke Energy convertible notes eyed; pricing of IG issuance cheapens; Southern, Alliant, PPL weaker

By Abigail W. Adams

Portland, Me., April 3 – The convertible primary market launched the first week of April with another outsized offering from an investment-grade issuer.

Duke Energy Corp. plans to price $1.5 billion of three-year convertible notes (Baa2/BBB) after the market close on Monday.

The deal modeled significantly cheaper than the three previous investment-grade issues from utility companies, which priced in late February, a reflection of changing market conditions and the large size of the offering.

There was some skepticism about the offering given the aftermarket performance of the previous wave of investment-grade paper.

However, it played to strong demand with the book oversubscribed and closing in the early afternoon.

As market players eyed the new deal in the works, the secondary space was quiet yet firm on a mixed day for equity markets.

The Dow Jones industrial average closed Monday up 327 points, or 0.98%, the S&P 500 index closed up 0.37%, the Nasdaq Composite index closed down 0.27% and the Russell 2000 index closed down 0.01%.

There was $53 million on the tape about one hour into the session and $262 million in reported volume about one hour before the market close.

While the overall market remained better to buy, the new offering sparked some selling in the recent IG issues, which had been on a strong uptrend over the past two weeks.

Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB), PPL Corp.’s 2.875% exchangeable notes due 2028 (Baa1/BBB+), and Alliant Energy Corp.’s 3.875% convertible notes due 2026 (BBB+) were weaker on the heels of the new offering.

Topical news pushed Ascendis Pharma A/S’ 2.25% convertible notes due 2028 into the spotlight with the notes tanking on an outright and dollar-neutral basis after the Federal Drug Administration identified deficiencies in the application for a product in the pipeline.

Duke eyed

Duke Energy plans to price $1.5 billion of three-year convertible notes (Baa2/BBB) after the market close on Monday with price talk for a coupon of 3.875% to 4.375% and an initial conversion premium of 25% to 30%, according to a market source.

The deal was heard to be in the market with assumptions of 125 basis points over SOFR and a 19% vol.

Using those assumptions, the deal looked about 1.43 points cheap at the midpoint of talk, a source said.

Other sources pegged assumptions as 125 bps over SOFR with a 21% vol., which lifted the cheapness of the deal to 2.3 points.

The convertible notes offering is the fourth one of the year from an investment-grade utility company.

The deal was significantly cheaper than its predecessors, which priced in late February, a reflection of changing market conditions and the large size of the offering.

However, Duke’s offering was well priced, a source said.

“This is good for what you have here,” a source said.

With the vol. low, the deal will mostly be a yield play and the yield for a three-year duration is in line with the broader market, the source said.

The offering seemed to be following the same playbook as the three previous IG issues from utilities, which initially struggled in the aftermarket before catching a bid as credit markets recovered over the past two weeks.

However, the offering played to strong demand with books oversubscribed and closing in the early afternoon.

It was heard to be pricing with a coupon of 4.125% and an initial conversion premium of 25%.

The deal “isn’t a screamer,” a source said.

But the premium is cheap, the sector is defensive, and with credit markets continuing their strong uptrend, the deal is expected to trade well.

Price change

Duke’s new convertible offering is being marketed with cheaper pricing than the previous three investment-grade issues from utility companies, which had shaky starts in the secondary.

The oversaturation of investment-grade issuance and the shockwaves from Silicon Valley Bank’s collapse in early March pressured those notes.

The notes have been on a strong uptrend over the past two weeks as credit markets ripped.

However, they were weaker on Monday on the heels of Duke’s offering.

Southern Co. marketed its $1.725 billion issue of 3.875% convertible notes due 2025 (Baa2/BBB) with assumptions of a 75 bps credit spread and a 21% vol.

The deal modeled about 0.75 point cheap at the midpoint of price talk for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The notes immediately sank below par on debut and were trading on a 98-handle for the first half of March but have been on a strong uptrend over the past two weeks.

The notes were active early Monday and trading at 100.875 versus a stock price of $68.80 early in the session, a source said.

They remained wrapped around 100.875 in the late afternoon.

The notes were down about 0.5 point dollar-neutral, a source said.

There was $46 million in reported volume.

Southern Co. stock traded to a low of $68.25 and a high of $69.63 before closing the day at $68.97, a decrease of 0.88%.

PPL Corp., the fist investment-grade deal of the year, marketed its $1 billion issue of 2.875% exchangeable notes due 2028 (Baa1/BBB+) with assumptions of a 125 bps credit spread and a 21% vol., which modeled 1.25 points cheap at the midpoint of initial price talk for a coupon of 3% to 3.5% and an initial exchange premium of 20% to 25%.

Price talk for PPL’s offering was tightened to 2.875% to 3.125% and an initial exchange premium of 22.5%.

The notes were initially strong on their aftermarket debut on Feb. 22 but quickly dropped below par amid the wave of investment-grade issuance.

The notes have been the underperformer of the IG issuance of 2023 and traded as low as a 96-handle following Silicon Valley Bank’s collapse.

They popped above par for the first time since their initial days in the market late last week.

However, the notes again dropped below par on Monday and were changing hands at 99.5 in the late afternoon.

PPL stock traded to a low of $27.31 and a high of $27.80 before closing the day at $27.58, a decrease of 0.76%.

Alliant Energy Corp.’s $575 million issue of 3.875% convertible notes due 2026 (BBB+), with assumptions of 100 bps over SOFR and a 22% vol., looked about 0.44 point cheap at the midpoint of price talk for a coupon of 3.375% to 3.875% and an initial conversion premium of 25% to 30%.

The notes saw a heavy aftermarket debut on Feb. 27 and were training on a 99-handle until mid-March.

The notes have been the best performers of the recent IG issues and were changing hands at 103 versus a stock price of $53.40 early in the Monday session.

The notes were trading at 102.625 versus a stock price of $53.10 in the late afternoon.

They contracted about 0.5 point dollar-neutral.

There was $10.5 million in reported volume.

Alliant stock traded to a low of $52.50 and a high of $53.21 before closing the day at $52.72, a decrease of 1.27%.

Ascendis descends

Ascendis’ 2.25% convertible notes due 2028 were the largest losers of Monday’s session.

The notes tanked on an outright and dollar-neutral basis after the FDA identified deficiencies in its TransCon PTH application.

The 2.25% notes sank 15 points outright with stock down 30%.

They were changing hands at 83 versus a stock price of $75.11 in the late afternoon.

The notes contracted 3 points dollar-neutral.

Ascendis stock traded to a low of $64.33 and a high of $77.77 before closing the day at $72.83, a decrease of 32.07%.

Mentioned in this article:

Alliant Energy Corp. Nasdaq: LNT

Ascendis Pharma A/S Nasdaq: ASND

Duke Energy Corp. NYSE: DUK

PPL Corp. NYSE: PPL

Southern Co. NYSE: SO

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