Morning Commentary: Luckin Coffee convertible offering, JPMorgan exchangeables eyed

By Abigail W. Adams

Portland, Me., Jan. 8 – After an extended holiday break, the convertibles primary market returned to action with two deals on the forward calendar.

J.P. Morgan Chase Bank, NA plans to price $500 million three-year cash-settled bonds exchangeable for Alibaba Group Holding Ltd. shares after the market close on Wednesday.

Price talk is for a fixed coupon of 0.125%, a fixed exchange premium of 20% and an offer price of 109.5, according to a market source.

The deal was heard to be in the market with a credit spread of 25 basis points over Libor and a 31% vol.

Using those assumptions, the fair value of the deal modeled out to 107.22, according to a market source.

With an offer price of 109.5, the deal appeared to be rich, the source said.

With JPMorgan the credit behind the deal and the tenor on the bonds three years, the credit spread of 25 bps made sense, another source said.

However, the 31% vol. for Alibaba stock seemed aggressive, the source said, and placed the vol. more at 23%.

With a vol. of 23%, the deal seemed even richer, the source said.

Luckin Coffee Inc. plans to price $400 million of five-year convertible notes after the market close on Thursday.

Price talk is for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal was heard to be in the market with assumptions of 600 bps over Libor and a 45% vol.

Using those assumptions, the deal looked to be about 5.125 points cheap at the midpoint of talk, a market source said.

The 600 bps credit spread may be a little aggressive for a Beijing-based company; however, the deal was priced cheaply enough to compensate for that, a source said.

Using an extremely conservative credit spread of 900 bps over Libor, the deal still looked slightly cheap at the midpoint of talk, the source said.

The deal is pricing concurrently with a 12 million secondary offering of American Depositary Shares, which will help significantly with the borrow, a source said.

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