Chewy exchangeables on tap; Southwest Airlines comes in; Carnival active; Trip.com eyed

By Abigail W. Adams

Portland, Me., May 4 – The convertibles primary market’s active pipeline of new deals continued on Monday with the first mandatory convertible on deck since volatility roiled capital markets in March.

2020 Mandatory Exchangeable Trust, a newly organized subsidiary of PetSmart Inc., plans to price $600 million mandatory three-year trust securities exchangeable for Chewy Inc. common stock after the market close on Monday.

The pricing seemed reasonable. However, the offering was somewhat atypical for a mandatory, sources said.

The primary market is expected to remain active throughout the week with several more deals in the pipeline.

Meanwhile, the secondary space saw a quiet start to the week with the market soft.

Southwest Airlines Co.’s 1.25% convertible notes due 2025 remained in focus with the notes coming in on an outright and dollar-neutral basis.

Carnival Corp.’s 5.75% convertible notes due 2023 were also active with the notes volatile alongside stock.

While volume was light, some market players were eyeing Trip.com Group Ltd.’s convertible notes with one issue’s maturity and another’s put date fast approaching.

Chewy on tap

2020 Mandatory Exchangeable Trust, a newly organized subsidiary of PetSmart, plans to price $600 million mandatory three-year trust exchangeable securities after the market close on Monday with price talk for a yield of 6.25% to 6.75% and a threshold appreciation premium of 17.5% to 22.5%, according to a market source.

The securities are exchangeable into Chewy common stock.

One of Chewy’s major shareholders was attempting to monetize their holdings, a source said.

The offering was somewhat “atypical” for a mandatory offering, another source said.

The structure was similar to Alibaba Group’s or New York Times Co.’s mandatories.

PetSmart is a well-known name in the high-yield and leveraged loan markets.

The specialty pet retailer’s transfer of a portion of subsidiary Chewy.com’s equity out of the reach of creditors in 2018 was a highly contentious move.

However, the private equity transfer was not as aggressive as anticipated and Chewy.com’s IPO in 2019 further helped PetSmart’s relationship with its creditors.

Proceeds from the offering will go to PetSmart and be used to pay off debt.

Southwest comes in

Southwest Airlines’ 1.25% convertible notes due 2025 continued to top the volume charts on Monday with the notes losing ground on an outright and dollar-neutral basis.

The notes were down about 3 points outright with stock off as much as 7% during Monday’s session.

The 1.25% notes traded as low as 101.5 and were on a 102-handle in the late afternoon.

They were contracted 0.75 point to 1 point dollar-neutral, a source said.

Southwest stock traded to a low of $26.50 and a high of $27.94 before closing the day at $27.56, a decrease of 5.71%.

Stock was taking a hit after Warren Buffet announced that Berkshire Hathaway had exited its position in U.S. airlines, including Southwest.

Carnival volatile

Carnival’s 5.75% convertible notes due 2023 were volatile on Monday alongside stock as Warren Buffet’s airline announcement shook the entire travel industry.

The 5.75% notes traded as low as 145 and as high as 155.5 on an outright basis as Carnival stock whipsawed between gains and losses.

Carnival stock traded to a low of $12.75 and a high of $14.58 before closing the day at $14.34, an increase of 2.98%.

While stock started the day in the red due to the oracle of Omaha’s proclamation about airlines, it swung back into positive territory after the cruise ship operator announced plans to resume North American operations in August.

Trip.com eyed

While volume was light, market players were eyeing Trip.com’s 1.99% convertible notes due 2025 and 1% convertible notes July 1, 2020 as their respective put date and maturity approaches.

The 1.99% convertible notes were changing hands at 99 on Monday with a yield to worst of 8.23%, according to a market source.

The notes become putable on July 1.

The 1% convertible notes were also trading at 99 with the yield to maturity 7.26%.

“That’s a nice little pickup,” a source said of the yields, provided the company can make the payment.

While the Shanghai-based provider of travel services, packaged tours and corporate travel management was rumored to be exploring a new convertible notes offering in April 2019, none transpired.

The notes were trading as if the market expected the company to cover them, a source said.

Mentioned in this article:

Carnival Corp. NYSE: CCL

Chewy Inc. NYSE: CHWY

Southwest Airlines Co. NYSE: LUV

Trip.com Group Ltd. Nasdaq: TCOM

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