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Why Shares of Under Armour Fell This Morning but Have Since Recovered

By Evan Niu, CFA - May 21, 2020 at 1:44PM

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The athletic apparel maker is restructuring some debt with a convertible senior note offering.

What happened

Under Armour (UA -0.11%) (UAA -0.56%) opened lower today, with both share classes down around 8% in early trading, after the company announced a convertible senior note offering. Both stocks have since recovered and are now in the green as of 12:45 p.m. EDT.

So what

The athletic apparel maker is proposing a $400 million offering for convertible senior notes that will come due in 2024. The paper will be offered to qualified institutional buyers, and those investors will have an option to purchase up to $60 million more in aggregate. The terms, such as conversion rate and interest rate, have not yet been finalized and will be determined by negotiations with investors.

Athlete playing basketball wearing Under Armour clothes

Image source: Under Armour.

Under Armour will enter into capped call transactions that will mitigate potential dilution from any conversions, and the consumer discretionary company says it plans to use most of the proceeds to pay off outstanding debt that it currently has under a revolver.

Now what

In response, credit rating agency Moody's also downgraded Under Armour's corporate family rating from Ba2 to Ba3, about three notches into junk territory. Analyst Mike Zuccaro commented, "Widespread temporary store closures and weaker discretionary consumer spending will result in significant incremental pressures on Under Armour's revenue, profitability and cash flow in 2020."

Institutional investors that buy convertible notes often go short the underlying stock as part of a convertible arbitrage strategy, which may have contributed to selling pressure earlier in the session.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.79 (-0.56%) $0.06
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$8.88 (-0.11%) $0.01

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