TWOD and the Implications of the Two Harbors Acquisition for Bondholders

The acquisition of Two Harbors Investment Corp. (TWO) by UWM Holdings Corporation (UWMC) has sent ripples through the mortgage finance sector, and bondholders of TWOD-the 9.375% Senior Notes due 2030-need to pay close attention. This $1.3 billion all-stock deal, which values each share of TWO at 2.3328 UWM Class A shares, is not just a strategic move for scale but a seismic event for TWOD holders. The key question now is: Will the merger trigger a mandatory call of TWOD, and if so, when?

The Indenture's Change of Control Provision: A Double-Edged Sword

TWOD's indenture includes a 101% change of control provision, meaning the issuer can redeem the bonds at 101% of their principal amount plus accrued interest if a change of control occurs. The merger between UWM and TWO qualifies as such an event, as it involves the transfer of control of Two Harbors to UWM. However, the devil is in the details. The indenture's exact language, while not fully disclosed in public filings, typically requires that the acquirer assumes the debt or provides equivalent terms. In this case, UWM's acquisition of TWO's assets and liabilities-including TWOD-suggests the change of control provision is likely to be triggered.

But here's the catch: TWOD's call provisions are tied to stock price performance, not just the merger itself. The indenture allows the company to call the notes on or after June 6, 2023, but only if the stock price has been at least 130% of the conversion price for 20 out of 30 consecutive trading days. Post-merger, the stock in question will be UWM's, not TWO's. If UWM's shares trade at a premium post-merger, the 130% threshold could be met quickly, accelerating the call. However, if UWM's stock underperforms, the call could be delayed.

The Merger Timeline: A Countdown to Redemption?

The merger is expected to close in Q2 2026, pending regulatory and shareholder approvals. This timeline is critical. If the deal closes as planned, UWM will assume control of TWOD, and the change of control provision will activate. But the timing of the call depends on UWM's stock price post-merger. For example, if UWM's shares trade at $20 (a hypothetical), and the conversion price of TWOD is $15.38 (based on the 2.3328 exchange ratio), the 130% threshold would be $19.99. If UWM's stock hits this level within 30 days of the merger's closing, the call could be executed almost immediately.

However, there's a wildcard: regulatory delays or shareholder lawsuits could push the merger's completion into late 2026 or even 2027. If that happens, TWOD holders might face a longer wait for redemption, during which the bonds could trade at a discount to par if market conditions sour.

What This Means for Bondholders

For TWOD holders, the merger is a mixed bag of opportunity and risk. On the upside, the 101% redemption price is a premium, offering a clear exit if the call is triggered. On the downside, the call's timing hinges on UWM's stock performance, which is subject to market volatility. If UWM's shares underperform, bondholders might be stuck holding TWOD until the 2030 maturity date, exposing them to interest rate risk and potential credit downgrades.

Investors should also note that the merger announcement has already caused TWOD to trade at a premium, reflecting market expectations of a call. However, this optimism could reverse if the merger faces legal hurdles or if UWM's stock stumbles.

The Bottom Line: Buy, Sell, or Hold?

In my view, TWOD is a high-conviction hold for now. The merger's structure and the 101% change of control provision strongly suggest a call is likely, but the timing remains uncertain. Bondholders should monitor UWM's stock price post-merger and the deal's regulatory progress. If the call is executed in early 2026, TWOD could deliver a tidy 1% premium. But if the call is delayed, the bonds' value could fluctuate significantly.

For those seeking certainty, selling TWOD before the merger closes might be prudent, especially if UWM's stock appears overvalued. But for those comfortable with the risk-reward tradeoff, TWOD could still be a compelling short-term play.