Nio widens talk; Cleveland-Cliffs sees large expansion; Illumina, Silicon Labs active

By Abigail W. Adams

Portland, Me., Jan. 30 – With Tesla Inc. on the verge of reporting fourth-quarter earnings, which were announced post-close, market players were focused on the convertible notes offering of Tesla’s competitor Nio Inc.

Price talk for the $650 million offering was widened during bookbuilding.

While the deal from the Shanghai-based electric car manufacturer was seen as cheap based on initial price talk, the borrow on the stock poses complications, sources said.

Meanwhile, the secondary space was hopping with markets strong following Federal Reserve chairman Jerome Powell’s remarks about future interest rate hikes.

There was $126 million on the tape a little over one hour into the session and more than $486 million on the tape by the late afternoon.

Illumina Inc.’s convertible notes were again major volume movers in the secondary space with the notes improving on a dollar-neutral basis as stock dropped after an earnings miss.

Cleveland-Cliffs Inc.’s 1.5% convertible notes due 2025 saw large gains on both an outright and dollar-neutral basis as stock surged due to skyrocketing iron ore prices.

Silicon Laboratories Inc.’s 1.375% convertible notes due 2022 were down outright but largely unchanged dollar-neutral in high-volume activity as stock plunged following its earnings miss.

Nio eyed

Nio planned to price $650 million of five-year convertible notes after the market close on Wednesday.

Price talk was widened to a coupon of 4.5% with an initial conversion price of 27.5% from the initial price talk of a coupon of 3.5% to 4% and an initial conversion premium of 27.5% to 32.5%.

Underwriters are marketing the deal with a credit spread of 600 basis points over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal modeled up to 10 points cheap at the midpoint of initial price talk, a market source said.

However, the borrow on the Shanghai-based electric car manufacturer’s American Depositary Shares is difficult, sources said.

Being conservative and factoring in 5 or 6 points on the borrow lowers the fair value of the deal to 101 at the midpoint of initial talk, a market source said.

However, the deal comes with a call spread, in addition to zero-strike call option transactions.

The zero-strike call options are equivalent to a borrow facility and will ease the problems with the borrow, a source said.

With the borrow facility the borrow may be around 2%, which would raise the fair value of the deal to 107, based on the initial talk, the source said.

However, hedge players must go through underwriters to establish their borrow, which is limiting, sources said.

The borrow facility is also good for only three years, which is the number of years until the Feb. 1, 2022 put.

Despite the complications with the borrow, sources agreed the deal was attractive.

Illumina improves

Illumina’s convertible notes were again major volume movers in the secondary space with the notes improving dollar-neutral as stock dropped after an earnings miss.

Illumina’s 0.5% convertible notes due 2021 were the most active of the tranches. The notes expanded about 0.5 point dollar-neutral, a market source said.

They were seen changing hands at 125 versus an equity price of $274.16. More than $33 million of the bonds changed hands during Wednesday’s session.

Illumina’s 0% convertible notes due 2023 expanded about 0.125 to 0.25 point dollar-neutral.

The notes were seen trading at 100.198. More than $20 million of the bonds were on the tape by the late afternoon.

Illumina’s 0% convertible notes due June 15, 2019 were largely unchanged dollar-neutral.

They were seen changing hands at 113.198 versus an equity price of $273.90. More than $10 million of the bonds were on the tape by the late afternoon.

Illumina stock traded as low as $268.62 before closing the day at $272.93, a decrease of 4.32%.

Stock took a hit following a mixed earnings report and first-quarter guidance, which missed expectations.

Illumina reported non-GAAP earnings per share of $1.32 versus analyst expectations for earnings per share of $1.36.

However, Illumina reported $867 million in revenue versus analyst expectations for $863 million in revenue.

Cleveland-Cliffs expands

Cleveland-Cliffs’ 1.5% convertible notes due 2025 saw a dollar-neutral expansion on Wednesday as stock surged on the rising price of iron ore.

The 1.5% convertible notes gained more than 16 points outright and were expanded 1.5 points dollar-neutral, a market source said.

They were seen trading at 143 versus an equity price of $10.79. More than $10 million of the bonds changed hands during Wednesday’s session.

Cleveland-Cliffs stock closed Wednesday at $10.82, an increase of 17.74%.

The Cleveland-based iron ore mining company’s stock soared as the price of iron ore increased following the failure of competitor Vale SA’s dam in Brazil.

Vale plans to dismantle all upstream dams in response to the dam failure, which killed 65 people.

The closures would temporarily halt iron ore production in those areas, which would cut output by about 10%.

Silicon Lab active

Silicon Lab’s 1.375% convertible notes due 2022 were dropping on an outright basis but were largely unchanged dollar-neutral as stock cratered following an earnings miss.

The 1.375% notes dropped more than 7 points outright. They were seen changing hands at 106.792 versus an equity price of $78.10.

More than $35 million of the bonds were on the tape by the late afternoon, making it one of the most actively traded issues in the secondary space.

Stock traded as low as $74.01 before closing the day at $76.85, a decrease of 14.19%.

Silicon reported non-GAAP earnings per share of 91 cents versus analyst expectations for earnings of 94 cents per share.

The semiconductor company reported revenue of $215.53 million for the quarter versus analyst expectations for revenue of $224.24.

Mentioned in this article:

Cleveland-Cliffs Inc. NYSE: CLF

Illumina Inc. Nasdaq: ILMN

Nio Inc. NYSE: NIO

Silicon Laboratories Inc. Nasdaq: SLAB

Tesla Inc. Nasdaq: TSLA

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