RBC’s airbag autocallables to be first note linked to Lyft two months after company’s IPO

By Emma Trincal

New York, May 28 – Just two months after ride-hailing company Lyft, Inc. made its debut on the Nasdaq, Royal Bank of Canada said it plans to issue the first note tied to the name despite a disappointing initial public offering.

The 12.8% to 13.8% airbag autocallable yield notes due June 4, 2020 linked to Lyft common stock will pay interest monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par if the shares close at or above the initial share price on any quarterly observation date.

The payout at maturity will be par unless the final share price is less than the conversion price, 65% of the initial share price, in which case the payout will be a number of the shares equal to $1,000 divided by the conversion price.

IPO-linked notes

It is not uncommon for issuers to use fresh names after an IPO as a way to generate interest among investors, according to data compiled by Prospect News.

Social networking company Facebook, Inc. for instance held its IPO in May 2012. The first structured note offering linked to the name came out at the end of August 2012: Citigroup Funding Inc.’s $1.1 million of 17% one-year autocallable equity-linked securities.

It took longer for Tesla Motors Inc. to see its first structured note. The company’s IPO happened in June 2010, and Barclays Bank plc’s $381,000 six-month reverse convertible notes priced in April 2013.

Netflix Inc. went public in May 2002. Data compiled by Prospect News dating back to 2004 showed the first deal on the stock in June 2006 with Credit Suisse (USA) Inc.’s $788,000 of one-year reverse convertible securities.

Many of those names are now the cornerstone of single stock-linked offerings. Notional sales tied to the stock of Facebook as sole underlier amount to $1.53 billion in 905 deals since the company’s IPO, according to the data. A total of $1.1 billion of notes in 1,026 deals are linked to the share price of Netflix as a single name.

A bad beginning

What surprised market participants was the rush to price a deal on Lyft, as the company has not enjoyed good publicity after a painful trading debut.

Lyft’s IPO took place March 29. The IPO price was $72.00 a share. The stock rose on the first day, reaching a high at $88.60, but did not hold onto its gains. It rallied a couple of days in early April, but the trend has been downward. The stock closed at $56.89 on Tuesday, down 21% from its IPO price and 37.8% lower than its all-time high, which was recorded on its first day of trading.

Rival ride-sharing company Uber Technologies, Inc. went public this month, pricing its IPO at $45.00 a share to trade for the first time on the New York Stock Exchange on May 10. It dropped on the first day as well. The stock closed on Tuesday at $40.95, 9% below the IPO price.

There hasn’t been an announced deal on Uber for the moment, according to the data.

Unicorns and tulips

“Lyft lost a ton of money, It’s kind of astronomical. The fact that people jumped into the IPO tells me something is off,” said Marc Gerstein, director of research at Chaikin Analytics.

“I guess people are out of their minds. They want to be associated with a unicorn. They would be better off flying to Vegas.”

Lyft announced a $9.02 loss per share earlier this month.

“Huge losses! This reminds me of tulipmania. It’s very hard to value this business. These guys are not trying to make a profit. They’re too busy spending.”

Too soon to tell

Without being so negative on the name, Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said he was not comfortable with the lack of any significant track record.

“It’s a covered call strategy. That’s fine. But the stock has only been trading for two months. You can’t do any technical analysis on it,” he said.

A covered call is an option strategy employed in a neutral market. The trade consists of a long position in a stock coupled with the sale of a call option. Investors short the call option to generate income, limiting their upside potential at the call strike price, which is the equivalent of the cap in the note. If the stock moves higher, they must sell at the strike price.

“People would argue that Lyft is overpriced. But who knows how it’s priced? It just doesn’t make sense to make a bet so early. The share price could have more upside. It could have more downside,” he said.

“A covered call is for stocks that will stay flat or will move slightly up. If it’s slightly down, you get to keep it.

“I would need to see how the market is reacting before I can even have a view on the stock. It’s just too new.”

UBS Financial Services Inc. and RBC Capital Markets, LLC are the agents.

The notes were scheduled to price on Wednesday.

The Cusip number is 78014H847.

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