Convertible buyers active on volatile day; iQIYI notes surge on follow-on stock offering

By Abigail W. Adams

Portland, Me., Jan. 18 – The convertibles primary market remained dormant on Wednesday with prospects for new deal activity before the week draws to a close diminishing.

However, the convertibles secondary space was active on a volatile day for equity markets.

While equity indexes gave up their gains from a strong open and closed deep in the red, buyers were continuing to put money to work in the secondary space, a source said.

The Dow Jones industrial average closed Wednesday down 614 points, or 1.81%, the S&P 500 index closed down 1.56%, the Nasdaq Composite index closed down 1.24% and the Russell 2000 index closed down 1.48%.

Indexes were boosted at the open by a Producer Price Index report that reflected a faster deceleration than anticipated.

While the data boosted bets for a 25 basis point rate increase in February, hawkish comments from Federal Reserve officials, a surprise drop in retail sales and a steep inversion of the yield curve sparked selling.

Buyers continued to lift the convertibles secondary space early in the session with the market expanding ¼ point.

While the secondary market gave back its gains to close the day unchanged, buyers remained active throughout the session with more offers on the table as the session progressed, a source said.

There was $120 million of convertibles on the tape about one hour into the session and $610 million in reported volume about one hour before the market close.

iQIYI, Inc.’s 2% convertible notes due 2025 continued their stunning reversal with the notes surging 5 points outright after announcing a follow-on stock offering.

Expedia Inc.’s 0% convertibles due 2026 (Baa3/BBB-/BBB-) saw heavy volume although with little movement in price.

American Airlines Group Inc.’s 6.5% convertible notes due 2025 continued to gain strength in active trade.

iQIYI surges

iQIYI’s 2% convertible notes due 2025 continued their stunning reversal with the notes surging 5 points on Wednesday after the Beijing-based media company announced a follow-on stock offering.

The notes broke above a 97-handle to trade in the 97.5 to 98 context in heavy volume, a source said.

The yield on the notes fell to 13.625%.

There was $16 million in reported volume.

iQIYI’s American Depositary Shares closed Wednesday at $5.45, a decrease of 2.5%.

However, the notes have long been a yield play with their put date of April 1, 2023.

The company’s follow-on offering further bolstered investor confidence that the notes redemption would be honored.

iQIYI announced a follow-on offering of 76.5 million shares on Tuesday with proceeds to be used for capital purposes, including the servicing of debt.

The 2% notes have launched a stunning reversal since mid-December when the notes traded down to a 73-handle.

Concern the company would not be able to close on its $500 million private placement of 6% convertible notes due 2028 with PAG Asia sparked heavy selling in the issue.

However, the notes have been on a massive upswing since announcing the closing of the private placement on Jan. 3.

The notes closed last Friday on an 88-handle.

American Airlines gains

American Airlines’ 6.5% convertible notes due 2025 continued to gain strength in active trade on Wednesday.

While volatile outright, the notes expanded dollar-neutral.

The 6.5% notes gained 2 points outright with stock up 2% early in the session.

The notes were changing hands at 128.5 versus a stock price of $17.25, according to a market source.

While the notes gave up their outright gains as stock turned red as the session progressed, they continued to perform well on hedge.

The notes were trading at 125.75 versus a stock price of $16.76 in the late afternoon.

They expanded 0.25 point to 0.5 point dollar-neutral, a source said.

American Airlines’ stock traded to a high of $17.64 and a low of $16.60 before closing the day at $16.64, a decrease of 2.61%.

Expedia active

Expedia’s 0% convertible notes due 2026 saw heavy volume on Wednesday although with little movement in price.

The 0% notes were seen in the 89 to 89.5 context with several large prints.

The yield was about 4%.

There was $22 million in reported volume, with the notes the most actively traded in the secondary market.

Expedia’s stock traded to a high of $109.43 and a low of $103.78 before closing the day at $103.88, a decrease of 2.51%.

Mentioned in this article:

American Airlines Group Inc. Nasdaq: AAL

Expedia Inc. Nasdaq: EXPE

iQIYI, Inc. Nasdaq: IQ

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