Clarios convertible preferreds on tap; China-based convertible notes rebound

By Abigail W. Adams

Portland, Me., July 28 – The convertibles primary market has been silent over the course of the week as equity markets whipsawed between record gains and brutal sell-offs amid an onslaught of earnings reports and a pending announcement from the Federal Reserve about the future of its easy money policies.

While new deal activity remains sparse, one deal does remain on the forward calendar and is set to price on Thursday.

Clarios International Inc. plans to price $500 million of three-year $50-par mandatory convertible preferred stock after the market close on Thursday.

The deal looked cheap. However, trading in the paper will be limited due the concurrent pricing of the company’s IPO.

Meanwhile, trading activity in the convertibles secondary space remained muted on Wednesday as the market awaited the latest announcement from the Federal Reserve.

While the Federal Reserve intimated that it was ready to begin tapering its bond buying program later in the year, the announcement was widely expected and did little to shake markets.

The Dow Jones industrial average closed the day down 128 points, or 0.36%, the S&P 500 index closed the day down 0.02%, the Nasdaq Composite closed up 0.7% and the Russell 2000 index finished the session up 1.51%.

There was $97 million in reported volume one hour into Wednesday’s session and $387 million on the tape about one hour before the market close.

The convertible notes of China-based companies remained in focus with the notes seeing a sharp snapback after a brutal three-day selling streak.

Pinduoduo Inc.’s 0% convertible notes due 2025 were the most actively traded name in the secondary space with the notes making large gains on an outright and dollar-neutral basis.

21Vianet Group Inc.’s 0% convertible notes due 2026 were also improved.

Clarios eyed

Clarios plans to price $500 million of three-year $50-par mandatory convertible preferred stock after the market close on Thursday with price talk for a dividend of 5.75% to 6.25% and a threshold appreciation premium of 17.5% to 22.5%, according to a market source.

The deal was heard to be in the market with assumptions of 300 basis points over Libor and a 27% to 30% vol. skew, a source said.

Using those assumptions, the deal looked 2.5 points cheap at the midpoint of talk.

The deal has been on the calendar for over a week due to the concurrent pricing of its IPO.

The mandatory convertible preferred stock offering enables the company to sidestep rules on how much can be raised through its IPO and enables it to complete all its needed financing in one fell swoop, a source said.

While the books for the deal were heard to be covered, there was little interest in the offering from some market players due to the inability to hedge.

Trading in the preferred stock will also be limited in the secondary space as the market waits for the company’s shares to free for trade.

China notes snap back

There was a dramatic rebound in the convertible notes of China-based companies on Wednesday after a brutal three-day sell-off.

Pinduoduo’s 0% convertible notes due 2025 were the most actively traded name in the secondary space with the notes making gains on an outright and dollar-neutral basis.

The 0% notes gained more than 5 points outright to trade up to a 92-handle.

The 0% notes were changing hands at 92.75 versus an equity price of $89.96 early in the session.

They were trading at 92.5 in the late afternoon.

The notes gained 2 points dollar-neutral, a source said.

Pinduoduo’s American Depositary Shares traded to a low of $85.15 and a high of $92.77 before closing the day at $91.89, an increase of 15.54%.

While improved on Wednesday, the notes have taken a beating over the past three sessions.

The notes were trading around 97 heading into last Friday’s session when the fire-sale in the equities of China-based companies began.

The 0% notes hit an all-time low of 87 in intraday activity the previous session.

21Vianet’s 0% convertible notes due 2026 also gained outright alongside its equity.

The 0% convertible notes were changing hands at 81 in the late afternoon.

They had traded as low as 77 in intraday activity the previous session.

21Vianet’s ADSs traded to a low of $15.40 and a high of $17.63 before closing the day at $17.15, an increase of 17.14%.

China-based companies saw a steep rebound in their equities on Wednesday as Beijing took steps to appease investors about its regulatory overhaul.

China’s security regulators convened a meeting with executives from investment banks on Wednesday, which helped ease concerns about the new regulations for the country’s for-profit tutoring services leaking into other industries, Bloomberg reported.

New regulations for China’s for-profit education services sparked the sell-off in China-based equities last Friday.

Mentioned in this article:

21Vianet Group Inc. Nasdaq: VNET

Pinduoduo Inc. Nasdaq: PDD

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