Uber Technologies is marketing a US$1.2bn convertible bond to refinance straight debt, continuing the trend of companies responding to higher interest rates by funding in the CB market.
Barclays and Bank of America are marketing the new five-year CB at a coupon and conversion premium of 0.75%-1.25% and 27.5%-32.5% for one day on Monday ahead of pricing after the close.
Defying the more typical decline once a company announces a CB, the ride-hailing giant’s shares rose 0.8% to US$54.89 Monday on top of their one-third surge over the past month. The shares have more than doubled this year.
Uber is using the money to fund the potential redemption of US$1bn principal of 7.75% senior unsecured notes maturing in 2025. The 7.75s, which can be called at 101.875% of par after December 20, are trading Monday at 101.60.
In addition to funding the early takeout of the 7.75s, Uber is spending a portion of the CB proceeds on a capped call, whereby the embedded call option on the CB is repurchased and warrants are sold at a higher strike price.
At the current share price, Uber would offset dilution up to a share price of nearly US$100 (US$95.81) assuming a 75% upper-strike on the capped call, above the roughly US$70 share price investors would be eligible to convert into the underlying shares.
The CB-plus-capped call is equivalent to straight debt but comes with a lower all-in cash cost.
Interestingly, Uber is choosing to keep in place US$1.15bn principal of a zero-coupon CB maturing in December 2025 that are convertible at a share price above US$80.84. It also has US$1.2bn of a 0.75% CB maturing in 2027 that are convertible at US$70.77.
Uber issued all the above-mentioned debt in 2020, the 7.75s in May of that year and the 0%/0.75% CBs in December.
The biggest difference now than 2020 is that Uber is phenomenally profitable. In its third quarter ended September 30, Uber generated Ebitda of US$600m on revenue of US$9.3bn, up from US$34m and US$8.3bn in the same period last year.
Uber commands a US$110bn market cap.
Moody’s and S&P upgraded the company's senior unsecured rating to Ba2 and BB- earlier this year. Inclusion in the S&P 500 seems likely, perhaps sometime next year.