8-K: Horizon Bancorp Completes $100M Subordinated Notes Offering

Horizon Bancorp, Inc. successfully completed a private placement of $100 million in 7.00% Fixed-to-Floating Rate Subordinated Notes due 2035.

Summary

• Horizon Bancorp, Inc. (HBNC) issued and sold $100.0 million in aggregate principal amount of 7.00% Fixed-to-Floating Rate Subordinated Notes due September 15, 2035.
• The notes were issued at 100% of their face amount.
• Net proceeds will be used for general corporate purposes, including potential balance sheet repositioning, and to redeem approximately $56.5 million of existing 5.625% Fixed-to-Floating Rate Subordinated Notes due 2030.
• The notes will bear a fixed interest rate of 7.00% per annum, payable semi-annually, until September 15, 2030.
• From September 15, 2030, until maturity, the interest rate will be a floating rate equal to the Three-Month Term SOFR plus 360 basis points, reset quarterly and payable quarterly.
• The notes are redeemable by the company, in whole or in part, on any interest payment date on or after September 15, 2030, and in whole upon certain events (Investment Company Event, Tax Event, or Tier 2 Capital Event), subject to regulatory approvals.
• The notes are unsecured, subordinated obligations, ranking junior to all existing and future Senior Indebtedness, and are intended to qualify as Tier 2 capital for regulatory purposes.
• The offering was conducted as a private placement, with a Registration Rights Agreement in place for a future Exchange Offer to register the notes.

Sentiment

Score: 7

Explanation: The successful completion of a significant capital raise and debt refinancing is a positive event, demonstrating access to capital markets and proactive balance sheet management. While the new debt carries a higher initial fixed rate, it supports strategic objectives and regulatory capital. The inherent risks of debt and market conditions are standard for such filings.

Positives

• Successfully raised $100.0 million in capital, strengthening the company's financial position.
• The new notes are structured to qualify as Tier 2 capital, enhancing regulatory capital ratios.
• Refinancing approximately $56.5 million of existing 5.625% subordinated notes due 2030, which could optimize the company's debt structure.
• The offering provides capital for general corporate purposes, including potential balance sheet repositioning, indicating strategic financial management.

Negatives

• The new 7.00% fixed interest rate is higher than the 5.625% rate of the notes being redeemed, increasing interest expense for the initial period.
• The floating rate period introduces interest rate risk, as payments will increase if Three-Month Term SOFR rises significantly.
• The notes are subordinated, meaning they rank junior to all Senior Indebtedness in right of payment, increasing risk for noteholders in a liquidation scenario.

Risks

• Uncertain conditions within the domestic and international macroeconomic environment, including trade policy, monetary and fiscal policy, and conditions in the investment, credit, interest rate, and derivatives markets.
• Changes in the level and volatility of interest rates, changes in spreads on earning assets, and changes in interest-bearing liabilities.
• Increased interest rate sensitivity.
• Aggregate effects of elevated inflation levels.
• Loss of key personnel.
• Increases in disintermediation and potential loss of fee income due to alternative payment platforms.
• Changes in prepayment speeds, loan originations, credit losses, market values, and collateral securing loans and other assets.
• Changes in sources of liquidity.
• Legislative and regulatory actions and reforms, and changes in accounting policies or procedures.
• Litigation, regulatory enforcement, and legal compliance risk and costs.
• Rapid technological developments and changes, cyber terrorism, and data security breaches, including rising cybersecurity costs.
• The ability of the U.S. federal government to manage federal debt limits.
• Climate change and social justice initiatives.
• Inability to realize cost savings or revenues or to effectively implement integration plans and other consequences associated with mergers, acquisitions, and divestitures.
• Acts of terrorism, war, and global conflicts (e.g., Russia/Ukraine, Israel/Hamas conflicts).
• Supply chain disruptions and delays.

Future Outlook

Horizon Bancorp, Inc. intends to use the net proceeds from the offering for general corporate purposes, including in support of the potential repositioning of its balance sheet, and to redeem approximately $56.5 million of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2030. The company also plans for an Exchange Offer to register the privately placed notes.

Management Comments

• John R. Stewart, CFA, Executive Vice President & Chief Financial Officer, is listed as the contact for the press release and signed the 8-K filing.

Industry Context

This subordinated debt offering is a common strategy for bank holding companies like Horizon Bancorp to raise capital that qualifies as Tier 2 capital under regulatory requirements. The refinancing of existing subordinated notes suggests an active approach to balance sheet management and optimizing funding costs or maturity profiles within the current interest rate environment. The use of SOFR as a benchmark rate aligns with the industry's transition away from LIBOR.

Comparison to Industry Standards

• NA The filing does not provide specific comparable company or project data to assess the results against global benchmarks. The interest rate and terms are specific to Horizon Bancorp's credit profile and market conditions at the time of issuance.

Corporate Governance

Stakeholder Impact

• **Shareholders**: Potential for improved capital ratios and financial flexibility, which could be viewed positively. Increased interest expense from the new notes could impact earnings.
• **New Noteholders**: Receive a 7.00% fixed-to-floating rate return on a subordinated debt instrument, with the notes intended to qualify as Tier 2 capital.
• **Existing 2030 Noteholders**: Approximately $56.5 million of their notes will be redeemed, providing them with principal and accrued interest.
• **Regulatory Authorities**: The offering is structured to qualify as Tier 2 capital, aligning with regulatory requirements for bank holding companies.

Next Steps

• Utilize net proceeds for general corporate purposes, including potential balance sheet repositioning.
• Redeem approximately $56.5 million in aggregate principal amount of 5.625% Fixed-to-Floating Rate Subordinated Notes due 2030.
• Company will take actions to provide for an Exchange Offer to register the notes under the Securities Act.

Key Dates

Recommendation

The successful completion of the subordinated notes offering and the planned refinancing are positive steps for Horizon Bancorp, enhancing its capital structure and providing financial flexibility. However, the higher interest rate on the new debt compared to the redeemed debt will increase interest expense, and the floating rate introduces future interest rate risk. While the transaction is strategically sound for a bank holding company, it does not present a clear catalyst for a 'buy' or 'sell' recommendation based solely on this filing. Investors should 'hold' and monitor the company's overall financial performance, balance sheet repositioning, and the impact of the increased interest expense.

Keywords

Subordinated Notes, Capital Raise, Tier 2 Capital, Fixed-to-Floating Rate, Debt Offering, Balance Sheet Repositioning, Refinancing, SEC Filing, Horizon Bancorp, HBNC, SOFR