Morning Commentary: Stem convertibles expand on debut; Oak Street up ahead of acquisition

By Abigail W. Adams

Portland, Me., March 30 – It was an active morning in the convertibles secondary space with new paper, topical news and an improved market tone jumpstarting activity in the market.

Stem Inc. priced an upsized $200 million of seven-year green convertible notes after the market close on Wednesday.

The new paper hit the secondary space as equity indexes extended their gains from the previous session with the Dow Jones industrial average up 135 points, or 0.41%, the S&P 500 index up 0.63%, the Nasdaq Composite index up 0.68% and the Russell 2000 index up 0.68% shortly before 11 a.m. ET.

Stem’s new 4.25% convertible notes due 2030 were making nominal gains in early trade. However, volume in the issue was light.

There was $110 million in reported volume about one hour into the session with Oak Street Health Inc.’s 0% convertible notes due 2026 accounting for nearly one-third of the total activity in the space.

Oak Street’s 0% convertible notes made large gains after CVS announced it expects to close its $10.6 billion acquisition of the company in the first half of 2023.

Stem expands

Stem priced an upsized $200 million of seven-year green convertible notes after the market close on Wednesday at par at the cheap end of talk with a coupon of 4.25% and an initial conversion premium of 27.5%.

There is a $40 million greenshoe.

Price talk was for a coupon of 3.75% to 4.25% and an initial conversion premium of 27.5% to 32.5%.

The initial size of the offering was $175 million with a greenshoe of $35 million.

The new paper was making nominal gains in early trade.

They were changing hands at 100.25 versus a stock price of $5.725 in early trade.

The notes expanded 0.375 point dollar-neutral, a source said.

Stem’s stock was changing hands at $5.80, an increase of 3.76%, shortly before 11 a.m. ET.

The deal came as a refinancing with $99.8 million of net proceeds used to repurchase $163 million in principal of the company’s 0.5% green convertible notes due 2028.

The 0.5% notes were repurchased at 61.038, about 4 points above their previous trading level, a source said.

Oak Street acquisition

Oak Street’s 0% convertible notes due 2026 made large gains in heavy volume early Thursday after CVS announced the timing for the closing of its acquisition of the company.

The 0% convertible notes jumped 5 points outright to 98.75 on the news.

There was $29 million in reported volume.

The notes have traded on a 93-handle for much of March as market players awaited updates on the closing of CVS’s $10.6 billion all-cash acquisition of the primary health care provider.

The notes bounced after CVS announced it expected the deal to close in the first half of 2023.

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