Morning Commentary: Utility companies jumpstart convertibles primary market

By Abigail W. Adams

Portland, Me., May 1 – The convertibles primary market launched into action early Monday after a week-long hiatus with utility companies continuing to tap the market for their refinancing needs.

CMS Energy Corp. became the latest utility company to launch an investment-grade offering with $650 million of five-year convertible notes (expected Baa2) on deck.

FirstEnergy Corp. also announced a $1 billion offering of three-year convertible notes.

While the convertible notes will not receive a credit rating, FirstEnergy has a strong credit profile with underwriter assumptions implying high-grade status.

The utility companies’ deals continued to model cheap compared to the first wave of high-grade convertible notes issuance in February.

Meanwhile, the secondary space was quiet on a mixed open for equities as market players digested JPMorgan’s buyout of First Republic Bank after the FDIC seized it post-close on Friday.

While some indexes opened lower, they brushed off losses to turn positive as the session progressed with the Dow Jones industrial average up 114 points or 0.34%, the S&P 500 index up 0.24%, the Nasdaq Composite index up 0.06% and the Russell 2000 index up 0.67% shortly before 11 a.m. ET.

There was $81 million in reported volume about on hour into the session with Duke Energy Corp.’s 4.125% convertible notes due 2026 (Baa2/BBB) and Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) collectively accounting for about $50 million of the activity in the space.

There appeared to be some selling in the names with accounts making way for the new paper.

CMS Energy eyed

CMS Energy plans to price a $650 million offering of five-year convertible notes after the market close on Monday with price talk for a coupon of 2.875% to 3.375% and an initial conversion premium of 20% to 25%.

The deal was heard to be in the market with assumptions of 120 basis points over SOFR and a 19% vol.

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

FirstEnergy in focus

FirstEnergy plans to price $1 billion of three-year convertible notes after the market close on Monday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%.

The deal was heard to be in the market with assumptions of 130 bps over SOFR and a 20% vol.

Using those assumptions, the deal looked 1.9 points cheap at the midpoint of talk.

FirstEnergy’s convertible notes will not receive a credit rating.

However, the electric utility company has a strong credit profile with the assumptions implying high-grade status, a source said.

FirstEnergy’s credit ratings have undergone several revisions over the past two years.

Moody’s Investors Service downgraded FirstEnergy’s senior unsecured rating to Ba1 from Baa3 in 2020 but flipped its outlook to positive in 2021.

S&P upgraded FirstEnergy’s issuer rating to BBB- in 2021 and its unsecured debt to BB+ in 2021 and revised its outlook to positive in February.

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