(Reuters) – Twitter (TWTR.N) is preparing a $1 billion convertible note offering, the social media hub said on Wednesday, one day after news that it would be included in the S&P 500 Index sent its shares up 5 percent to the highest price in more than three years.
Convertible bonds behave like an option in that they grant holders of the security the right to exchange them for equity above a pre-established price, giving the company scope to reduce coupon payments on the debt.
There have been 22 convertible offering by technology companies this year, raising in total almost $9 billion, according to Thomson Reuters IFR.
“The stock price has certainly turned around from where it was last year … The momentum in the stock may give investors a reason to at least look at this deal,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.
Twitter is taking advantage of strong investor demand for convertible bonds, which allow investors a downside-protected way to participate in the stock. Twitter’s stock would need to rise to $77.64 before investors would be eligible to convert into the underlying stock. The shares were trading around $40 at midday Wednesday.
“We assume the main purpose of the new convert will be to pay off the old one,” wrote Dave King, senior portfolio manager at Columbia Threadneedle Investments.
While the conversion price, interest rate and other details have yet to be set, concerns about the prospect of more shares coming onto the market sent its stock down about 2 percent in premarket trade before a recovery that saw it extend Tuesday’s rally about 0.4 percent at mid morning.
Twitter will market the convertible at a coupon of 0.125 percent to 0.625 percent and a 40 percent to 45 percent conversion premium to the current share price, leads on the deal told IFR. That would put it at the higher end of recent conversion premiums. Only 3 of the 22 technology companies that issued convertible bonds this year were in that high range, according to IFR.
This is a popular strategy that other tech companies have used to offset dilution to very high share prices. For instance the financial payments processor Square (SQ.N) last month raised $862.5 million on the sale of a five-year convertible with a conversion premium of 42.5 percent.
The company is using net proceeds for general corporate purposes and to purchase call spread options to offset future dilution and to repurchase part of a convertible that matures in 2019, Twitter said.
That was part of a two-part convertible issue that Twitter sold in September 2014, comprised of five-year and seven-year tranches, according to IFR data.
“The timing of a convertible bond deal with the company’s entrance into the S&P 500 makes sense,” said King. “There will likely be a strong bid for the stock from index funds.”
King said this could offset selling pressure from convertible arbitrageurs trying to establish short positions in Twitter in anticipation of going long the new convertible bond.
Goldman Sachs, Morgan Stanley and JP Morgan are expected to price the deal later on Wednesday, according to IFR.
Reporting by Kate Duguid and Lewis Krauskopf in New York and Robert Sherwood of IFR; Writing by Alden Bentley; Editing by Phil Berlowitz