Virgin Galactic reopens primary with wall-crossed offering; Lucid improves; Ford gains

By Abigail W. Adams

Portland, Me., Jan. 13 – The convertible bond primary market returned to action on Thursday with the first new deal of the year set to price after the market close.

Virgin Galactic Holdings Inc. plans to price $425 million of five-year convertible notes after the market close on Thursday.

The deal looked cheap based on underwriters’ assumptions. However, the deal was heard to be wall-crossed.

Meanwhile, trading activity in the convertibles secondary space was muted with equity markets again under pressure.

Growth names again led losses despite a 10-year Treasury yield that was on the decline.

The Dow Jones industrial average closed the day down 177 points, or 0.49%, the S&P 500 index closed down 1.42%, the Nasdaq Composite closed down 2.51% and the Russell 2000 index closed down 0.76%.

The 10-year Treasury yield broke through the 1.7% threshold and hit 1.694% before closing the day at 1.703%.

However, markets are now bracing for the likelihood of 4 to 5 rate increases in the coming year, despite the mixed economic data released on Thursday.

The sell-off in equities was also due to pre-earnings jitters with the big banks set to report prior to the market open on Friday, a source said.

Despite the continued volatility in equities, market players were in wait-and-see mode with about $500 million in reported convertible bond volume about one hour before the close.

Lucid Group Inc.’s 1.25% convertible notes due 2026 remained active with the notes continuing to improve after taking a beating dollar-neutral.

Ford Motor Co.’s 0% convertible notes due 2026 continued to outperform as the company’s stock hit its highest level in almost two decades.

Virgin Galactic eyed

Virgin Galactic plans to price $425 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal was heard to be in the market with assumptions of 600 basis points over Libor and a 45% vol. with a borrow of 1%, a source said.

Using those inputs, the deal looked 4.75 points cheap at the midpoint of talk.

However, other sources felt the company, which went public through a SPAC, deserved a wider credit spread.

Using a credit spread of 800 bps over Libor and a 45% vol., the deal looked 1.875 points cheap.

The company, which produces no revenue, is heavily shorted.

However, assuming a normal borrow and using underwriters’ assumptions, the deal modeled 7.5 points cheap at the midpoint of talk.

“The borrow makes a huge difference, a source said.

The deal becomes the latest convertible notes offering to price off of a company’s 52-week low.

Virgin Galactic’s stock closed at its lowest level in two years, ending the day at $10.03, a decrease of 18.92%.

However, the deal was heard to be wall-crossed and books closed in the early afternoon.

Proceeds from the offering will help Virgin Galactic in the space race with the company a forerunner in commercial space travel.

While sources were skeptical of the offering, it was interesting with CEO Sir Richard Branson a character.

Lucid improves

Lucid’s 1.25% convertible notes due 2026 continued to improve in high-volume activity on Thursday after taking a beating dollar-neutral.

The notes were marked at 101.75 versus a stock price of $44.78 early in the session.

They continued to trade at 101.75 versus a stock price of $43 in the late afternoon.

The notes were “fighting back” dollar-neutral, a source said, with the notes again improved after also increasing during Wednesday’s session.

Lucid’s stock traded to a high of $46.29 and a low of $41.36 before closing the day at $41.41, a decrease of 8.85%.

The 1.25% notes have been volatile since the electric vehicle maker priced the $2.01 billion offering in mid-December.

However, the notes have been under pressure the last two weeks and contracted about 5 points dollar-neutral.

Ford’s new height

Ford’s 0% convertible notes due 2026 continued to outperform on Thursday with stock hitting its highest level in almost two decades.

The 0% convertible notes were changing hands at 157.5 versus a stock price of $25.19 early in the session.

They expanded another 0.5 point dollar-neutral, a source said.

Ford’s stock traded to a high of $25.87 and a low of $24.37 before closing the day at $25.02, an increase of 2.27%.

The company surpassed a $1 trillion market cap during Thursday’s trading.

Ford’s stock has been on an upward trajectory since its pivot into electric vehicle manufacturing materialized.

Stock was again boosted to new heights following an analyst’s price target increase and reports of delays in the production of Tesla’s Cybertruck.

Ford’s electric F-150 has been met with strong demand and the company recently announced plans to double its production.

Mentioned in this article:

Ford Motor Co. NYSE: F

Lucid Group Inc. Nasdaq: LCID

Virgin Galactic Holdings Inc. NYSE: SPCE

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