iQIYI’s $1.05 billion convertibles looks ‘cheap,’ existing notes contract; SSR Mining expands

By Abigail W. Adams

Portland, Me., March 26 – Despite the soft tape on Monday, the primary market launched a billion-dollar deal, which market players were focused on during Tuesday’s session.

iQIYI Inc. planned to price $1.05 billion of six-year convertible notes after the market close on Tuesday. The deal looked “cheap” and was heard to be doing well in bookbuilding, sources said.

While iQIYI’s offering was in the works, the company’s 3.75% convertible notes due 2023 were contracting in high-volume activity.

While focus was on iQIYI on Tuesday, some recent deals to hit the market were active and making gains.

Chegg Inc.’s recently priced 0.125% convertible notes due 2025 were approaching par on Tuesday.

SSR Mining Inc.’s 2.5% convertible notes due 2039 were also making gains on an outright and dollar-neutral basis.

iQIYI looks cheap

iQIYI plans to price $1.05 billion of six-year convertible notes after the market close on Tuesday with a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

Underwriters were marketing the deal with a credit spread of 400 basis points over Libor and a 37% vol., according to a market source.

Using those assumptions, the deal modeled up to 9 points cheap at the midpoint of talk, a source said.

However, the borrow on iQIYI’s American Depositary Shares is expensive, which will reduce the cheapness of the deal.

Other sources pegged assumptions as 750 bps over Libor and a 45% vol. Even with a wider credit spread, the deal modeled about 3 points cheap, the source said.

The deal is coming with a total return swap, or a type of borrow facility that will last for six months, a market source said.

While the deal modeled cheap, some sources were apprehensive.

The new offering from iQIYI is its second convertible note deal in less than six months. iQIYI priced a $750 million issue of 3.75% convertible notes due 2023 in November 2018.

The Beijing-based online entertainment service provider is a $17 billion market cap company and can get away with it, a source said.

However, the company provided no clear path to a positive free cash flow, which raises concern it will have to repeatedly tap capital markets, another source said.

Despite this, the deal was heard to be doing well during bookbuilding with the books closing early.

The market is still looking for new paper, which may be driving demand for the notes, a market source said.

The offering is also a Rule 144A and Regulation S deal, which increases its audience.

While equities were rebounding on Tuesday, sources were surprised to see such a large deal launch on Monday, given the conditions in the market.

With the yield curve between three-month Treasury bills and 10-year notes inverted, issuers may be worried about the future direction of the market.

There may be a rush to get deals done sooner rather than later when conditions may make issuing new convertibles more costly, a market source said.

iQIYI contracts

While iQIYI’s new offering was in the works, the company’s 3.75% notes due 2023 were active in the secondary space with the notes seeing a large contraction.

The 3.75% notes were seen at 120.75 versus a stock price of $24.02 prior to the market open, according to a market source.

They were changing hands at 116.875 early in Tuesday’s session and dropped to 116.5 by the late afternoon.

The notes were contracted 2 to 3 points dollar-neutral, a market source said.

iQIYI stock closed Tuesday at $22.87, a decrease of 4.79%.

The 3.75% notes were trading with a credit spread of 640 bps over Libor and a 45% vol., a market source said.

The 3.75% notes were expensive, which is why they experienced such a large contraction, another source said.

SSR Mining improves

SSR Mining’s 2.5% convertible notes due 2039 reached their highest level since hitting the secondary space.

The 2.5% convertible notes traded up to 103. They were expanded about 0.5 point dollar-neutral, a market source said.

SSR Mining stock closed Tuesday at $13.59, a decrease of 0.51%.

While expanded dollar-neutral, the 2.5% convertible notes have largely hovered around par since hitting the secondary market on March 14.

Chegg improves again

Chegg’s recently priced 0.125% convertible notes due 2025 continued to improve on Tuesday. The notes were approaching par in high-volume activity as stock rebounded.

The 0.125% notes were trading hands at 99.25 early in the session and reached 99.5 by the late afternoon.

Chegg stock closed Tuesday at $38.31, an increase of 2.74%.

The 0.125% notes dropped as low as 97 on their market debut last Friday as stock tanked following the release of a short-seller report.

Mentioned in this article:

Chegg Inc. NYSE: CHGG

iQIYI Inc. Nasdaq: IQ

SSR Mining Inc. Nasdaq: SSRM

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.