American Water exchangeable notes price, gain on trading debut; high-grade names active

By Abigail W. Adams

Portland, Me., June 27 – The convertibles primary market was quiet on Tuesday after pricing one deal post-close on Monday.

In the latest in a wave of investment-grade issuance, American Water Capital Corp. priced $900 million of three-year notes (Baa1/A) exchangeable for American Water Works Co. Inc.’s common shares.

The deal was the latest in a notable trend of high-grade companies turning to the convertibles market for their financing needs.

However, the majority of issuance has come from utility companies.

“It will be interesting to see if it spills over to corporates,” a source said.

While the rate environment has made convertibles an attractive option for capital raises, stock prices are keeping companies from greenlighting some of the backlogged deals in the pipeline, a source said.

However, an uptick of issuance is expected as companies, which had been holding out on refinancings in hopes rates would decrease, come to terms with the fact that additional rate hikes are possible.

Meanwhile, the secondary space saw an uptick of activity as American Water’s new notes made their aftermarket debut.

The new paper hit the secondary space on a strong day for equities with markets shrugging off the weakness of the previous week.

The Dow Jones industrial average closed Tuesday up 212 points, or 0.63%, the S&P 500 index closed up 1.15%, the Nasdaq Composite index closed up 1.65% and the Russell 2000 index closed up 1.46%.

There was $524 million in reported convertible bond trading about one hour before the market close with American Water accounting for one-fifth of the total activity in the space.

The notes were putting in a solid performance and traded largely as expected with nominal gains.

Outside of the new paper, activity in the market was once again concentrated in high-grade names, particularly in short-duration issues.

Western Digital Corp.’s 1.5% convertible notes due Feb. 1, 2024 (Baa3) and Illumina Inc.’s soon-to-mature 0% convertible notes due Aug. 18, 2023 (BBB) were active although with little movement in price.

American Water in focus

American Water priced $900 million of three-year exchangeable notes after the market close on Monday at par with a coupon of 3.625% and an initial exchange premium of 22.5%.

Pricing came at the midpoint of talk for a coupon of 3.375% to 3.875% and at the cheap end of talk for an initial exchange premium of 22.5% to 27.5%.

The new paper played to solid demand from hedge and outright accounts during book building although the market’s enthusiasm about high-grade paper has waned.

It was putting in a solid performance in the secondary space with volatility better bid on Tuesday.

“Buyers are coming for the bonds,” a source said. “The vol. is better than it was yesterday.”

The new paper was changing hands in the 100.375 to 100.625 context with stock up early in the session.

It was trading in the 100.5 bid, 101 offered area in the late afternoon and closed the day at 100.875 versus stock price of $142.88, sources said.

The notes expanded about 0.25 point dollar-neutral.

The deal was performing largely as expected for short-dated, investment-grade paper.

“You’re not going to see big moves one way or the other,” a source said.

There was $112 million in reported volume.

American Water’s stock traded to a low of $139.32 and a high of $143.15 before closing at $142.88, an increase of 1.89%.

Short-duration notes

Investment-grade names accounted for the lion’s share of activity during Tuesday’s session with short-duration names seeing heavy volume.

Illumina’s ’s soon-to-mature 0% convertible notes due Aug. 18, 2023 continued to change hands as their maturity approaches.

However, the notes saw little movement in price.

The 0% notes were trading just shy of 99.25 in the late afternoon, according to a market source.

There was $10 million in reported volume.

Western Digital’s 1.5% convertible notes due Feb. 1, 2024 also saw heavy volume.

The notes were trading at 97 with a yield of about 6.625% in the late afternoon, according to a market source.

There was $14 million in reported volume.

Both issues are out-of-the-money and have long traded for the yield with the notes to be redeemed at par upon maturity.

Mentioned in this article:

American Water Works Co. Inc. NYSE: AWK

Illumina Inc. Nasdaq: ILMN

Western Digital Corp. Nasdaq: WDC

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