(Reuters) - Twitter Inc (N:TWTR) 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 a more than three-year high.
Convertible bonds grant holders the right to exchange them for equity above a pre-established price, giving the company scope to reduce coupon payments on the debt.
The company said on Thursday the private placement of senior unsecured notes due 2024 was priced at a 0.25 percent coupon.
The offering is expected to result in about $989 million in net proceeds and settle on June 11, the company said.
There have been 22 convertible offerings 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 closed at $40.10 on 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.
Concerns about the prospect of more shares coming onto the market sent Twitter's stock down about 2 percent in premarket trade before a recovery that saw it extend Tuesday's rally.
Twitter's 0.25 percent coupon and 42.5 percent conversion premium compare with the 0.125 percent to 0.625 percent and 40 percent to 45 percent respective marketing ranges, sources told IFR on Wednesday.
That would put it at the higher end of recent conversion premiums. Only three 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, financial payments processor Square (N:SQ) last month raised $862.5 million on the sale of a five-year convertible with a conversion premium of 42.5 percent.
Twitter said it will use 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.
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 on the new convertible bond.
Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and JP Morgan are expected to price the deal later on Wednesday, according to IFR.