Morning Commentary: iQIYI’s upsized convertibles issue hits the market, expands

By Abigail W. Adams

Portland, Me., Nov. 30 – The convertible secondary space opened Friday with $650 million in new paper hitting the market.

iQIYI Inc. priced an upsized $650 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 3.75% and an initial conversion premium of 40%.

Price talk had been for a coupon of 3.25% to 3.75% and an initial conversion premium of 40% to 45%, according to a market source.

The initial size of the deal was $500 million with a greenshoe of $75 million.

The new paper dominated activity in the secondary space and was making gains on both an outright and dollar-neutral basis.

They were trading between 100.5 to 100.75 out of the gate but pushed pass 101.5 as stock improved.

The majority of trades were outright, but there was also a decent amount on swap, a market source said.

The notes were up about 0.5 point dollar-neutral. iQIYI’s American Depositary Shares traded down out of the gate but rose 1.2% shortly before 11 a.m. ET.

“I guess nobody’s worried about the borrow for now,” a market source said.

While the deal modeled cheap at the midpoint of talk, the borrow on the Beijing-based online entertainment service provider was difficult, sources said.

Outside of the new paper, Workday Inc.’s 0.25% convertible notes due 2022 were active as stock surged on a third-quarter earnings beat.

The 0.25% notes rose about 8 points outright to 124.25 but were contracting about 1 point dollar-neutral on the way up.

Workday stock jumped 12.8% early in Friday’s session.

The 0.25% notes are a large issuance that was held primarily by outright accounts. Outright accounts were selling on the move with hedge accounts buying, a market source said.

The notes have always traded rich. “This took some of the richness out of them,” a market source said.

Workday beat on both the top and bottom line in its third-quarter earnings.

The software company reported earnings per share of 31 cents versus analyst expectations of earnings per share of 14 cents.

The company reported revenue of $743.2 million versus analyst expectations for revenue of $723 million.

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