Western Digital on deck; Airline descent continues, JetBlue, Spirit Air notes pummeled

By Abigail W. Adams

Portland, Me., Oct. 30 – The convertibles primary market returned to action on Monday with a large refinancing deal on deck as sources questioned what the calendar will look like heading into the final months of the year.

Western Digital Corp. plans to price $1.3 billion of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 3% to 3.5% and an initial conversion premium of 25% to 30%, according to a market source.

J.P. Morgan Securities LLC is the bookrunner for the Rule 144A offering, which carries a greenshoe of $200 million.

Proceeds will be used to repurchase a portion of the company’s 1.5% convertible notes due 2024 in privately negotiated transactions and repay the remaining outstanding amount upon their maturity.

While sources expect to see more refinancings, it is unclear what the calendar will look like for companies attempting to raise capital to sustain operations.

Meanwhile, the secondary space saw a slow start to the week as equity markets recovered with a packed calendar for macro news ahead.

Equity indexes expressed optimism and Treasuries uncertainty with the Federal Open Market Committee set to commence its second-to-last meeting of 2023 on Tuesday.

The Dow Jones industrial average closed Monday up 511 points, or 1.58%, the S&P 500 index closed up 1.20%, the Nasdaq Composite index closed up 1.16% and the Russell 2000 index closed up 0.63%.

Treasury yields continued to widen with the 10-year closing the session up 4.8 basis points at 4.889%.

Markets have been volatile over the past month with rate and recession forecasts continually revised.

While the selling pressure in the convertibles secondary space abated on Monday, certain sectors remained weak as investors fled the stocks of companies beholden to capital markets.

Investors remain wary of companies that will need to raise capital to sustain operations with the current rate environment.

“There’s the feeling that dilution will be the only solution,” a source said.

There was $47 million in reported volume about one hour into the session and $292 million on the tape about one hour before the market close.

Regional airlines continued to get pummeled with earnings spelling trouble for the industry.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) were weaker in heavy volume with low-cost airlines the hardest hit in the sector.

However, Spirit Airlines Inc.’s 1% convertible notes due 2026 and JetBlue Airways Corp.’s 0.5% convertible notes due 2026 crumbled as the Department of Justice lawsuit to block the merger heads to trial.

American Airlines Group Inc.’s 6.5% convertible notes due 2025 were the outliers to the destruction in the sector on Monay with the notes higher after heavy selling the past month.

Earnings-related volatility also continued to spark movement in the space with onsemi’s convertible notes mixed in active trade as stock tanked on the heels of weak guidance.

Airlines under pressure

Regional airlines continued to take a hit on Monday with lackluster earnings, reduced demand and high fuel costs continuing to weigh on the sector.

Southwest’s 1.25% convertible notes due 2026 shaved off about 1 point outright as stock wavered between gains and losses.

The notes traded down to 96.125 in the late afternoon, according to a market source.

There was $17 million in reported volume with the notes the most active in the secondary space.

Southwest’s stock traded to a low of $22.01 and a high of $22.56 before closing at $22.51, up 0.76%.

American Airlines’ convertible notes due 2025 were the outlier with the notes high outright in active trade.

The 6.5% notes added 1 point outright with stock up about 2%.

They were changing hands at 101.75 versus a stock price of $11.15 in the late afternoon, according to a market source.

There was $10 million in reported volume.

American Airlines’ stock traded to a low of $11 and a high of $11.24 before closing at $11.18, up 2.38%.

While the 6.5% notes saw a temporary reprieve on Monday, they have also seen selling pressure over the past month with the notes falling 7 points outright as stock fell about 12%.

Merger meltdown

While the broader sector was under pressure, Spirit Airlines’ 1% convertible notes due 2026 and JetBlue’s 0.5% convertible notes due 2026 continued to crumble as the DOJ’s lawsuit to block the merger of the two airlines heads to trial.

Spirit’s 1% convertible notes due 2026 fell another 4 points outright.

The notes traded down to a 68-handle and were trading at 68.125 heading into the close.

The notes contracted several points dollar-neutral on the move, a source said, compounding losses from the previous week when it also sank several points dollar-neutral.

Spirit Airlines’ stock traded to a low of $12.95 and a high of $14.71 before closing at $13.06, a decrease of 11.10%.

The company also saw a credit rating downgrade on Monday with Fitch Ratings downgrading the airline to B from B+.

JetBlue’s 0.5% convertible notes due 2026 fell another 2.5 points outright with stock up more than 1.5%.

They were trading at 67.625 versus a stock price of $4.13 in the late afternoon.

There was $11 million in reported volume.

JetBlue’s stock traded to a low of $4.09 and a high of $4.24 before closing at $4.20, up 1.69%.

There is a large holder with a hefty stake in both JetBlue’s 0.5% convertible notes due 2026 and Spirit Airlines’ 1% convertible notes due 2026 that has been “forced to sell” due to the destruction in the issues, a source said.

With the completion of the JetBlue/Spirit merger in jeopardy, Spirit’s stock is expected to continue its downtrend with analysts valuing the stock at half of its current level with no merger.

onsemi mixed

onsemi’s convertible notes were mixed in active trade as the semiconductor stock tanked following weak guidance.

onsemi’s high dollar price 0% convertible notes due 2027 fell outright but made large gains dollar-neutral as stock sank double digits.

The 0% convertible notes due 2027 were off 24 points outright to trade at 139 early in the session.

They were seen at 137.5 versus a stock price of $67.25 in the late afternoon.

The notes expanded 1 to 2 points dollar-neutral on the move down, sources said.

onsemi’s 0.5% convertible notes due 2029 traded down to their lowest level since the $1.5 billion issue priced in February.

The notes sank about 11 points outright to trade at 91.25 early in the session.

They were trading at 91 versus a stock price of $67.33 in the late afternoon.

The notes were unchanged to contracted 1 point on the move down, sources said.

There was $8 million in reported volume.

The longer duration notes were under pressure with the pick-up in volatility not enough to compensate for the push out in the credit spread, a source said.

onsemi’s stock traded to a high of $73.59 and a low of $64.99 before closing at $65.34, a decrease of 21.77%.

While onsemi beat on both the top and bottom lines with its third-quarter earnings, its weak forecast sparked heavy selling in the stock.

Mentioned in this article:

American Airlines Group Inc. Nasdaq: AAL

JetBlue Airways Corp. Nasdaq: JBLU

onsemi Nasdaq: ON

Southwest Airlines Co. NYSE: LUV

Spirit Airlines Inc. NYSE: SAVE

Western Digital Corp. Nasdaq: WDC

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