Southern offsets credit rating exposure with mandatory
Facing a potential credit downgrade, Southern Co responded by raising US$1.75bn from the sale of a mandatory convertible security, using the proceeds to repay portions of legacy debt that included convertible bonds.
Bank of America, JP Morgan and Mizuho Securities were joint bookrunners on the three-year mandatory priced at a 7.125% dividend and 25% conversion premium, after marketing for one day on Monday at 6.75%–7.25% and 20%–25%.
The regulated utility’s shares fell 0.9% on Monday to US$93.15, setting the conversion price at US$116.44 and paring gains since the beginning of 2024 to nearly 33% from US$70.12.
As part of the new deal, Southern simultaneously repurchased portions of US$674.4m principal of a US$943.4m 3.875% CB maturing in December and US$342m principal of a US$1.17bn 4.5% CB that matures in June 2027. Those securities are convertible at US$84 and US$92.45 respectively.
The high-end premium pricing on the mandatory offsets dilution to a stock that trades at 22 times 2025 EPS, a significant premium to utility peers, while also supporting credit ratings.
The financing comes after Moody’s last month revised its outlook on Southern’s Baa1 senior unsecured debt rating to negative, citing a 13.7% increase in total debt to US$72.3bn, US$2.25bn of dividends paid to shareholders in the first nine months of 2025, and US$1.25bn of negative free cashflow.
In reporting Q3 EPS of US$1.60, Southern reaffirmed plans to spend US$76bn on capex from 2025 to 2029, the bulk of which will support regulated electricity generation and AI generative power capacity. The utility added 2 gigawatts of data centre capacity in Q3, expects to have 7GW of data centre power online by 2029, and has a pipeline for 50GW through the mid-2030s.
Southern benefited from the lack of recent mandatory issuance, the last utility mandatory being a US$1.4bn raise by PG&E in December 2024.
Regulated utilities have made CBs a regular part of their fixed-income funding needs. On Monday, Michigan-based CMS Energy raised an upsized US$850m from the sale of a 5.5-year CB priced at a 3.25% coupon and 25% conversion premium, the investor-friendly ends of 2.75%–3.25% and 25%–30% marketed for one day.
Despite the investor-friendly end pricing, the utility opted to upsize the offering to US$850m, from the US$750m sum marketed.
In 2023, CMS issued an US$800m CB priced at a 3.375% coupon and 20% conversion premium to its share price at the time.
In marketing the latest deal, joint bookrunners Morgan Stanley, Wells Fargo, Barclays, Citigroup and Mizuho Securities guided accounts toward a credit spread and vol of SOFR+100bp and 19, highlighting the pinpoint precision in pricing.