Secondary tone improves; Pinduoduo, Bilibili convertible notes rebound; airlines gain

By Abigail W. Adams

Portland, Me., March 16 – There was an uptick of activity in the convertibles secondary space as equity markets extended their rally in the wake of the Federal Reserve’s announcement regarding rate hikes.

The Dow Jones industrial average closed the day up 519 points, or 1.55%, the S&P 500 index closed up 2.24%, the Nasdaq Composite closed up 3.77% and the Russell 2000 index closed up 3.14%.

There was $84 million in reported convertibles trading volume about one hour into the session and $562 million on the tape about one hour before the market close.

“The tone is definitely better,” a source said. “It was really bad earlier in the week.”

While there was a period of uncertainty following the release of the Federal Reserve’s decision regarding rate hikes, his comments on the strength of the economy alleviated some of the recession fears that had prompted selling earlier in the week, sources said.

The ADR space remained in focus with the equity of China-based companies outperforming the market following positive comments from Beijing.

Pinduoduo Inc.’s beleaguered 0% convertible notes due 2025 remained the top traded issue in the space as the Shanghai-based e-commerce platform’s American Depositary Shares saw the largest single-day gain in their history.

Bilibili Inc.’s 0.5% convertible notes due 2026 were also up sharply in active trading.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) and American Airlines Group Inc.’s 6.5% convertible notes due 2025 were also on the rise during Wednesday’s session.

The rebound

The convertible notes of China-based companies were trading up sharply on an outright basis as their equities notched record single-day gains.

Pinduoduo’s 0% convertible notes due 2025 remained the top traded issue in the space.

The 0% notes jumped 6 points outright as its equity climbed more than 50%.

The notes were changing hands at 85.5 versus an equity price of $36.74 early in the session, according to a market source.

They were trading at 87 versus an equity price of $40.58 in the late afternoon.

The yield on the notes dropped to 8.348%.

There was $28 million in reported volume.

Pinduoduo’s ADS saw their largest single-day gain in history on Wednesday and traded to a low of $35.64 and a high of $42.97 before closing the day at $42.62, an increase of 56.06%.

The long-busted convertible notes, which largely trade for their yield, hit an all-time low of 82 during Monday’s session.

Bilibili’s 0.5% convertible notes gained almost 6 points outright.

They were changing hands at 72 versus an equity price of $25.01 early in the session.

They were trading at 73.25 versus an equity price of $26.41 in the late afternoon.

The yield on the notes dropped to about 12.5%.

There was $11 million in reported volume.

Bilibili’s ADS traded to a low of $22.71 and a high of $28.09 before closing the day at $27.83, an increase of 47.56%.

The 0.5% convertible notes traded to an all-time low of 66 on Monday.

China-based convertible notes have taken a beating over the past few sessions as delisting fears and Beijing’s latest regulatory crackdown sparked a sell-off in the space.

However, the ADR space rebounded strongly on Wednesday following a statement from China’s financial policy arm pledging support for capital market stability and overseas stock listings.

Airlines rise

The convertible notes of airlines were also on the rise on Wednesday following comments from industry leaders about travel demand.

Southwest Airlines’ 1.25% convertibles due 2025 were up 2 points outright with stock up about 2.5%.

The notes were changing hands at 132.375 versus a stock price of $42.28 in the late afternoon.

There was $25 million in reported volume.

Southwest’s stock traded to a low of $41.83 and a high of $43.27 before closing the day at $43.08, an increase of 2.43%.

American Airlines’ 6.5% convertible notes due 2025 gained 3.5 points outright with stock up more than 5%.

The 6.5% convertible notes were changing hands at 125.5 versus an equity price of $16.04 in the late afternoon.

Stock traded to a high of $16.49 and a low of $15.53 before closing the day at $16.47, an increase of 5.78%.

Southwest’s and American’s convertible notes were under pressure earlier in the month amid the surge in crude oil futures.

While Southwest’s 1.25% convertible notes held on a dollar-neutral basis, the notes dropped to 121 last week, their lowest level since 2020.

American’s 6.5% convertible notes fell on an outright and dollar-neutral basis, trading as low as 113 the previous week.

The convertible notes were driven down by surging crude oil futures, which pressured the travel sector.

The notes have recovered alongside stock as crude oil futures have come in.

Industry leaders speaking at the JP Morgan Industrial Conference also gave upbeat revenue forecasts for the first quarter due to strong travel demand and stated they have been able to pass rising fuel costs to the consumer.

Mentioned in this article:

American Airlines Group Inc. Nasdaq: AAL

Bilibili Inc. Nasdaq: BILI

Pinduoduo Inc. Nasdaq: PDD

Southwest Airlines Co. NYSE: LUV

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