iQIYI convertible notes contract following SEC investigation; Farfetch tops double par

By Abigail W. Adams

Portland, Me., Aug. 14 – The convertibles secondary space saw light trading volume on Friday as activity surrounding the new paper to price over the week continued to wane.

There was $61.6 million in reported volume about one hour into the session and $300 million in the mid-afternoon.

One name dominated the tape – iQIYI Inc.

The Beijing-based online entertainment service provider’s 2% convertible notes due 2025 and 3.75% convertible notes due 2023 dropped on an outright basis and dollar-neutral basis after the company disclosed that it was being investigated by the Securities and Exchange Commission.

While under investigation, iQIYI is not expected to be another Luckin Coffee Inc., the Beijing-based coffee shop chain whose equity delisted following an accounting fraud scandal.

Luckin’s 0.75% convertible notes due 2025 continue to trade with buyers hopeful there will be a settlement with the company, a source said.

While volume was light, Evolent Health Inc.’s new 3.5% convertible notes due 2024 were trading up in the aftermarket after the health care organization priced the notes in an exchange for a portion of its 2% convertible notes due 2021.

Farfetch Ltd.’s recently priced 3.75% convertible notes due 2027 topped double par in active trading as stock skyrocketed following the online fashion retailers’ second-quarter earnings.

iQIYI contracts

iQIYI’s convertible notes were in focus on Friday with the notes dropping on an outright and dollar-neutral basis after it disclosed the SEC was investigating its accounting.

The 2% convertible notes due 2028 sank almost 9 points outright to 88.75 in the late afternoon.

The notes contracted about 1.5 points dollar-neutral, a source said early in the session.

The notes saw $25 million in reported volume by the late afternoon.

While volume was lighter, iQIYI’s 3.75% convertible notes due 2023 sank below par.

The notes dropped down to 98 late Friday after previously trading on a 108-handle.

The 3.75% notes were also contracted about 1.5 points dollar-neutral.

iQIYI’s American Depositary Shares traded to a high of $19.75 and a low of $18.20 before closing the day at $19.26, a decrease of 11.16%.

The streaming service announced late Thursday that the SEC had launched an investigation and is examining its financial and operating records since its January 2018 IPO.

The SEC is also looking into the company’s acquisitions and investments, Bloomberg reported.

In April, short-seller Wolfpack Research alleged iQIYI was inflating the cost of acquisitions to burn off “fake cash” the company created through inflated revenue in the report “iQIYI: The Netflix of China? Good Luckin.”

While the company may be under investigation, iQIYI and its convertible notes are not expected to follow the same trajectory as Luckin Coffee, a source said.

Luckin Coffee delisted in June after the company revealed that sales figures and revenue had been inflated.

While Luckin’s 0.75% convertible notes carry an investor put upon a delisting event, there has been no notice from the company about the put, a source said.

The 0.75% notes continue to trade in the aftermarket with the notes recently changing hands at 40, a source said.

Buyers of the notes may be hopeful the cash on the company’s balance sheet is accurate and the company can cover or at least settle its debt.

But “who knows if (the balance sheet) is right,” a source said.

Evolent exchanges

While volume was light, Evolent Health’s new 3.5% convertible notes due 2024 were trading up in the aftermarket.

The 3.5% notes hit a high of 102 before dropping to par with stock off more than 10%.

While the majority of trades were outright, hedge players were beginning to get involved, a source said.

Evolent Health stock traded to a high of $31.82 and a low of $12.21 before closing the day at $12.61, a decrease of 10.06%.

While stock sold off on Friday, it hit a new 52-week high of $14.02 on Thursday.

Evolent Health issued $32.8 million of the 3.5% notes in an exchange with holders of its 2% convertible notes due 2021.

The company exchanged $84.2 million of the 2% notes for the 3.5% notes and $2.5 million cash, Prospect News reported.

Evolent priced a $125 million issue of the 2% notes in 2016.

Farfetch tops double par

Farfetch’s recently priced 3.75% convertible notes due 2027 shot past double par in active trading on Friday as stock surged following earnings.

The 3.75% notes rose more than 13 points outright to 203 in the mid-afternoon.

While the notes may have been slightly improved dollar-neutral, the deep-in-the-money notes are most likely on a 100% delta and largely move in line with stock, a source said.

Farfetch stock traded to a high of $31.88 and a low of $28.42 before closing the day at $28.56, an increase of 8.39%.

The online fashion retailer reported a loss per share of 31 cents in the second-quarter, versus analyst expectations for a loss of 37 cents.

Revenue was $365 million versus analyst expectations for revenue of $327 million.

Farfetch priced a $400 million issue of the 3.75% notes at par in late April.

Mentioned in this article:

Evolent Health Inc. NYSE: EVH

iQIYI Inc. Nasdaq: IQ

Farfetch Ltd. NYSE: FTCH

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