Morning Commentary: Sempra preferreds hit a hungry market

By Abigail W. Adams

Portland, Me., Jan. 5 – Sempra Energy’s $1.5 billion in 6% series A mandatory convertible preferred stock due 2021 hit a secondary market hungry for new paper on Friday morning.

The preferreds, which priced at par of $100, were trading at 101.5 shortly after the market open versus an underlying equity of $108.00. They were up about 50 basis points, stock adjusted, a market source said.

The preferreds priced after the market close on Thursday on the rich end of talk with a dividend of 6% and an initial conversion premium of 22.5%, despite a blizzard with hurricane force winds that tore through New York City.

“It was a very successful transaction,” a syndicate source said. “It was oversubscribed multiple times. We got the low end of the coupon and the high end of the premium.”

Price talk had been for a dividend of 6% to 6.5% and an initial conversion premium of 17.5% to 22.5%, according to market sources.

There was heavy fundamental allocation for the deal, which was offered concurrently with a $2.5 billion equity offering, the source said.

The preferreds were designed to appeal primarily to the outright community, such as Sempra’s existing shareholders and mutual funds.

While some technical hedge funds may become involved, the mandatory convertible preferreds “are generally not the most interesting product for them,” the source said.

The high yield on Sempra’s common stock, which is about 3%, would make short selling difficult, a market source said.

The preferred stock is expected to trade up as the San Diego-based electricity and natural gas utility and infrastructure company’s equity rises. With a supply and demand imbalance driven by the recent cold snap in the Northeast, the oil and gas sector has been on the rise.

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