Luckin Coffee convertibles rip higher; Air Transport eyed; cannabis names catch a bid

By Abigail W. Adams

Portland, Me., Jan. 16 – The convertibles secondary space continued to see heavy trading volume on Thursday, despite no new paper entering the space.

Luckin Coffee Inc.’s 0.75% convertible notes due 2025 continued to dominate activity in the secondary space with the notes ripping higher on an outright and dollar-neutral basis.

Air Transport Services Group, Inc.’s 1.125% convertible notes due 2024 saw renewed attention as the aircraft leasing and air cargo transportation service provider priced a high-yield bond offering.

Health care names continued to see decent volume in large part due to the JPMorgan health care conference.

The space has been catching a bid since the fourth quarter and launched 2020 on strong footing after “being left for dead,” for much of 2019, a source said.

The cannabis sector was also starting to catch a bid with several names on the rise.

Aphria Inc.’s 5.25% convertible notes due 2024 saw a large dollar-neutral expansion in the run up to its second-quarter earnings report.

Tilray Inc.’s 5% convertible notes due 2023 were also posting gains.

Luckin rips higher

Luckin Coffee’s 0.75% convertible notes due 2025 continued to rip higher in high-volume activity on Thursday.

The 0.75% notes traded up to 111.5 in the late afternoon.

They were up over 2 points dollar-neutral during Thursday’s session alone, a source said.

“They’re a beast,” one source said.

“They’re a monster,” another source said. “They just keep ripping higher.”

The notes saw more than $22 million in reported volume less than one hour into the session and almost $40 million in reported volume by the market close.

Luckin’s ADS were also on the rise alongside the broader market.

The ADS changed hands as high as $48.88 before closing the day at $48.53, an increase of 7.53%.

The notes have outperformed since hitting the aftermarket on Jan. 10.

They were up as much as 4 points dollar-neutral on their secondary market debut on Jan. 10 and have continued their upward momentum since.

Air Transport eyed

Air Transport Services Group’s 1.125% convertible notes due 2024 saw renewed attention in the secondary space as the aircraft leasing and air cargo transportation service provider prepped a high-yield bond offering.

The 1.125% notes were hovering around 99 during Thursday’s session.

The notes were most likely a yield play with the yield to maturity about 1.3%, sources said.

The notes, which are typically slow to trade, have been active throughout the week as the company marketed its $400 million offering of high-yield notes.

The offering was upsized to $500 million and priced on Thursday at par with a coupon of 4.75%. Initial guidance was in the 5.25% area.

With interest rates low and credit spreads between investment-grade and high-yield bonds at historic tights, potential issuers may be forgoing convertible bonds in favor of straight debt, a source said.

Air Transport may be the latest example of an emerging trend that included Twitter Inc.

Twitter’s high-yield offering turned heads with the social media company pricing with a 3-handle – it was one of the best executions for a high-yield bond offering in 2019.

However, in Air Transport’s case, it was most likely good for the company’s outstanding convertible that it opted to issue a high-yield bond, another source said.

Proceeds from the high-yield bond offering will be used to pay down the company’s revolving credit facility.

Cannabis sector

The cannabis sector has seen renewed attention in recent trading days with several names catching a bid after struggling in 2019.

Aphria’s 5.25% convertible notes due 2024 gained upwards of 7 points dollar-neutral over the past week, according to a market source.

While not active on Thursday, the notes were changing hands at 73.5 at the start of the week.

Aphria announced a mixed earnings report on Tuesday with bottom line results of a 3 cent loss per share, which was in line with expectations.

However, the reported revenue of C$120.6 million missed analyst expectations for revenue of C$129.8.

Aphria stock gained more than 10% in the run up to its earnings report on Monday. However, stock has since given back most of those gains. Stock closed Thursday at $5.19, a decrease of 0.95%.

While Tilray’s stock was down on Thursday, it has been on the rise throughout the week following news that two new executives – one from Molson and another from Revlon – had joined the company.

Tilray’s 5% convertible notes due 2023 were likewise on the rise with the notes gaining upwards of 7 points, a market source said.

The 5% notes were changing hands at 57.25 on Thursday.

Tilray stock closed Thursday at $20.43, a decrease of 4.35%. However, stock has gained more than 17% since Monday.

“A lot of guys are coming back to the (cannabis) space,” a market source said. “In the last two weeks, there’s been a real bid for the paper.”

Mentioned in this article:

Air Transport Services Group, Inc. Nasdaq: ATSG

Aphria Inc. NYSE: APHA

Luckin Coffee Inc. Nasdaq: LK

Tilray Inc. Nasdaq: TLRY

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