Utility companies jumpstart convertibles primary market; FirstEnergy upsizes; onsemi up

By Abigail W. Adams

Portland, Me., May 1 – The convertibles primary market launched into action on 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.

While the convertible notes will not receive a credit rating, FirstEnergy Corp. also announced an offering of three-year convertible notes that was heard to have upsized to $1.3 billion from $1 billion.

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

And while there was no doubt the deals would get come, there was little enthusiasm for more paper from utility companies.

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

Indexes wavered between nominal gains and losses throughout the session before closing either side of unchanged.

The Dow Jones industrial average was down 46 points, or 0.14%, the S&P 500 index was down 0.14%, the Nasdaq Composite index was down 0.11% and the Russell 2000 index was up 0.05%.

Duke Energy Corp.’s 4.125% convertible notes due 2026 (Baa2/BBB) and Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) continued to dominate activity in the space with some selling in the names as accounts make space for new paper.

While volume was light, onsemi’s 0.5% convertible notes due 2029 eliminated their losses from the previous week and made large outright and dollar-neutral gains as stock soared post-earnings.

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.

While there was little doubt the offering would cross the finish line, it offered little excitement.

“It’s just more utility paper,” a source said.

The deal is expected to price toward the cheap end of talk.

FirstEnergy upsized

FirstEnergy plans to sell an upsized $1.3 billion, from $1 billion, offering 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, sources said.

While the chunky offering was playing to decent demand, the offering was not a screamer and was heard to be pricing toward the cheap end 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.

Investment-grade trades

Duke Energy’s 4.125% convertible notes due 2026 and Southern Co.’s 3.875% convertible notes due 2025 continued to dominate the tape with some selling in the names as accounts cleared space for new paper.

Duke Energy’s 4.125% convertible notes were changing hands in the 101.75 to 102 context in heavy volume throughout the session.

Duke’s stock traded to a low of $98.59 and a high of $100.13 before closing at $99.07, off 0.19%.

Southern Co.’s 3.875% convertible notes due 2025 were changing hands in a tight range around 103.

Southern Co.’s stock traded to a low of $73.33 and a high of $74.56 before closing at $74.08, an increase of 0.72%.

The investment-grade notes have attracted more credit-oriented investors to the convertibles market with many playing the notes off of CDSs, a source said.

onsemi’s earnings

While volume in the name was light, onsemi’s 0.5% convertible notes due 2029 eliminated their losses from the previous week and made strong gains on an outright and dollar-neutral basis.

The 0.5% notes gained about 6 points outright with stock up about 9%.

They were trading at 101.875 in the late afternoon.

The notes expanded on the move up.

onsemi’s stock traded to a low of $74.17 and a high of $78.98 before closing at $78.33, an increase of 8.85%.

Stock jumped after a surprise earnings beat and upbeat guidance.

The semiconductor company reported earnings per share of $1.19 versus analyst expectations for earnings per share of $1.08 on revenue of $1.96 billion versus the $1.92 billion expected.

Guidance also came in well above expectations with onsemi projecting second-quarter revenue of $1.975 billion to $2.075 billion, versus the $1.932 billion expected, and earnings per share of $1.14 to $1.28, versus the $1.06 expected.

The earnings surprise came after a heavy week for the semiconductor sector with weak earnings from industry peers dragging down onsemi’s stock and convertible notes.

The 0.5% notes hit their lowest outright level of 96 late last week.

Mentioned in this article:

CMS Energy Corp. NYSE: CMS

Duke Energy Corp. NYSE: DUK

FirstEnergy Corp. NYSE: FE

onsemi Nasdaq: ON

Southern Co. NYSE: SO

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