Morning Commentary: Sempra’s $500 million convertible preferreds come at talk midpoint

By Abigail W. Adams

Portland, Me., July 11 – The active pace of convertibles issuance continued into the second quarter with the primary market pricing another $500 million before the market open on Wednesday after $1.5 billion in new paper hit the market on Tuesday.

Sempra Energy priced $500 million three-year par of $100 series B mandatory convertible preferred stock before the market open on Wednesday at the midpoint of talk with a coupon of 6.75% and an initial conversion premium of 20%.

Price talk was for a dividend of 6.5% to 7% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

The deal was priced concurrently with $1.1 billion, or 9.75 million shares, of common stock at a public offering price of $113.75, which were sold to forward purchasers as part of a forward sales agreement with the initial forward sales price $111.873125 per share.

The mandatory preferreds were trading up in the gray market. They were seen shooting to $100.875 from $100.25 before the opening bell.

The 6.75% preferreds continued to move up alongside stock and were seen wrapped around $101 early in the session with common stock at about $115.50.

The concurrent common stock offering was priced decently, a market source said. “It’s always a good play for a mandie because they’re supporting the common,” the source said.

The forward sales agreement was not a borrow facility and may have been more about accounting. “There’s plenty of stock to borrow,” the source said.

While hedge players do get involved in mandatory preferreds for the flip, they mostly appeal to equity income funds and outright accounts, a market source said.

“It’s a defensive play on the equity,” the source said. Sempra stock has had a good run recently, shooting up more than 15% mid-June.

The pricing of the series B mandatory convertible preferreds did not appear to have much impact on the Sempra’s 6% series A mandatory convertible preferreds, which priced in January.

Sempra’s 6% series A preferreds were down about $1 to $102.5 early Wednesday in light trading volume.

While the higher dividend on the series B preferreds may have taken “some of the zip” away from the series A preferreds, the move was largely in line with common stock, a market source said.

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