Morning Commentary: Alliant convertibles ‘marginally cheap,’ third IG name to tap market

By Abigail W. Adams

Portland, Me., Feb. 27 – The convertibles primary market promised another active week with one deal slated to price after the market close on Monday.

Alliant Energy Corp. became the third investment-grade company to come to the convertibles primary market in the span of five business days with its offering of $500 million of three-year convertible notes (BBB+).

Price talk is for a coupon of 3.375% to 3.875% and an initial conversion premium of 25% to 30%.

The deal was heard to be in the market with assumptions of a 100 basis points credit spread and a 22% vol., a source said.

Using those assumptions, the deal looked about 0.44 points cheap at the midpoint of talk, a source said.

The deal looked “marginally cheap,” another source said.

However, there is nearly always unmet demand for investment-grade paper in the market, “so you can get away with a lack of cheapness that you can’t with other credit qualities,” the source said.

While there were signs of indigestion in the market with Southern Co.’s $1.5 billion issue of 3.875% convertible notes due 2025 (Baa2/BBB) struggling on its aftermarket debut on Friday, the recent surge in IG issuance in the market was hailed as a positive long-term sign.

“This is good. This is an uptick in quality credit,” a source said.

While pricing may need to cheapen if the rapid pace of IG issuance continues, “I’d much rather have a lot of IG paper than CCC paper,” a source said.

Meanwhile, the secondary space remained active with new paper continuing to drive trading activity.

While equity markets launched Monday strong, Southern Co.’s 3.875% convertible notes due 2025 continued to struggle.

The Dow Jones industrial average was up 194 points, or 0.64%, the S&P 500 index was up 0.73%, the Nasdaq Composite index was up 0.86% and the Russell 2000 index was up 1.12% shortly before 11 a.m. ET.

There was $102 million of convertibles trading volume on the tape about one hour into the session with Southern Co.’s convertible notes accounting for nearly half of the reported volume in the space.

The 3.875% convertible notes were changing hands at 99.25 versus a stock price of $65.31 early in the session.

There was $44 million in reported volume.

Southern Co.’s stock was $65.23, an increase of 1.04%, shortly before 11 a.m. ET.

The 3.875% notes sank to a 99-handle and contracted 0.75 point dollar-neutral on their aftermarket debut last Friday.

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