Carnival convertibles contract; Luckin Coffee sell-off continues; China-based notes eyed

By Abigail W. Adams

Portland, Me., April 3 – The convertibles secondary space saw decent trading volume on Friday as equity markets stood poised to close out a volatile week in the red.

While volume was decent with more than $400 million on the tape by the late afternoon, activity was dominated by two names – Carnival Corp. and Luckin Coffee Inc.

Carnival’s newly priced 5.75% convertible notes due 2023 remained volatile their second day in the secondary space.

While the notes continued to trade in a wide range on an outright basis, they stood poised to close the day with a dollar-neutral contraction.

Luckin Coffee’s 0.75% convertible notes due 2025 continued to sell off on Friday following the revelation that sales figures from 2019 had been doctored.

The scandal dragged down the convertible notes of other China-based companies with investors losing confidence in their accounting practices.

IQIYI Inc.’s 2% convertible notes due 2025 and Nio Inc.’s 4.5% convertible notes due 2024 were trading off in sympathy.

Carnival contracts

Carnival’s 5.75% convertible notes due 2023 saw another volatile session their second day in the secondary space.

The notes continued to trade in a wide range on an outright basis.

They traded as high as 103.75 shortly after the opening bell, dropped as low as 99.25 in the early afternoon but returned to a 102-handle heading into the market close.

“That’s a high vol.,” a market source said. “The market has no confidence in the credit.”

While the notes were seen in line early in the session, they were pegged as contracted heading into the market close.

One source saw the notes in about 1.5 points dollar-neutral in the late afternoon.

Carnival stock traded to a low of $8.02 and a high of $8.74 before closing the day at $8.49, an increase of 6.52%.

The convertible notes were also volatile on their market debut, trading as low as 98 and as high as 105 on an outright basis.

The notes were expanded as much as 2 points dollar-neutral in intraday trading on Thursday although they closed the session flat, sources said.

While the market may be expressing skepticism about Carnival’s prospects, if the market is wrong and the company is able to survive, the rewards will be huge, a source said.

Under pressure

Luckin Coffee’s 0.75% convertible notes due 2025 continued to top the volume chart as the sell-off in the company’s notes and equity continued.

The notes were changing hands around 21 on Friday as stock continued its downward momentum.

Luckin’s ADR traded to a high of $7.35 and a low of $5.28 before closing the day at $5.38, a decrease of 15.94%.

The 0.75% convertible notes tanked on Thursday, dropping almost 60 points outright and contracting 30 points on a dollar-neutral, or hedged, basis as stock plunged as much as 75%.

Luckin’s convertible notes and equity sold off after the Beijing-based coffee shop chain announced that an internal investigation had found the chief operating officer had fabricated sales figures in 2019.

The convertible notes of several other China-based companies were under pressure in kind on Friday, a market source said.

IQIYI’s 2% convertible notes due 2025 traded down to 84.5 on Friday. They were trading on an 88-handle at the start of the week.

The Beijing-based online video platform’s ADR traded to a high of $17.86 and a low of $16.57 before closing the day at $17.06, a decrease of 4.69%.

Nio’s 4.5% convertible notes due 2024 sank further into distressed territory. The Shanghai-based electric car manufacturer’s notes traded down to 39 on Friday.

They were in the mid-40s earlier in the week.

IQIYI’s and Nio’s convertible notes were trading off in reaction to Luckin’s news, a source said.

“People don’t know if they should trust the books,” the source said.

Mentioned in this article:

Carnival Corp. NYSE: CCL

IQIYI Inc. Nasdaq: IQ

Luckin Coffee Inc. Nasdaq: LK

Nio Inc. NYSE: NIO

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