ADR space ‘wrecked’; China-based convertible notes contract 3 to 5 points

By Abigail W. Adams

Portland, Me., Oct. 24 – The convertibles primary market remained dormant on Monday following a week of no issuance.

While some sources were surprised no issuers came to market the previous week, new deal activity is expected in the coming days.

Meanwhile, it was a quiet day in the convertibles secondary space on a choppy day for equity markets with indexes wavering between positive and negative territory before extending their gains from Friday’s strong session.

The Dow Jones industrial average closed Monday up 417 points, or 1.34%, the S&P 500 index closed up 1.19%, the Nasdaq Composite index closed up 0.86% and the Russell 2000 index closed up 0.35%.

There was $45 million in reported volume about one hour into the session and $340 million on the tape about one hour before the market close.

Asian names dominated the space with the convertible notes of China-based companies “wrecked” as their equity tanked double digits after Xi Jinping solidified his power at the China Communist Party Congress.

Names in the space saw contractions of 3 points to 5 points dollar-neutral as investors sold in the face of more hardline policies out of Beijing.

ZTO Express, Nio Inc., Pinduoduo Inc. and Li Auto Inc. were among the hardest hit in the space.

While based in Singapore, Sea Ltd.’s 0.25% convertible notes due 2026 were also lower in heavy volume.

Wrecked

The convertible notes of China-based companies were “wrecked” in heavy volume as China’s leader solidified his power and surrounded himself with hardliners at the China Communist Party Congress.

ZTO’s 1.5% convertible notes due 2027 sank 11 points outright and contracted 3.5 points dollar-neutral in heavy volume.

The 1.5% convertible notes were changing hands at 83.625 versus an equity price of $17.87 early in the session.

They fell to trade at 81.5 versus an equity price of $16.99 in the late afternoon.

There was $13 million in reported volume.

ZTO’s equity traded to a high of $19.21 and a low of $16.28 before closing the day at $16.80, a decrease of 21.64%.

Monday marked the lowest level for the notes since the $1 billion issue, which priced at par, hit the aftermarket in late August.

Pinduoduo’s 0% convertible notes due 2025 also fell on an outright and dollar-neutral basis with the large yield to put doing little to protect the notes.

The 0% notes fell to an 88-handle and were changing hands at 88.5 versus an equity of $43.22.

They contracted 4 points dollar-neutral, a source said.

The yield on the notes was brushing up again 11.5%.

There was $13 million in reported volume.

Pinduoduo’s equity traded to a low of $38.80 and a high of $48.30 before closing the day at $44.46, a decrease of 24.61%.

Pinduoduo’s 0% convertible notes are putable at par on Dec. 1, 2023.

The 0% notes held well last week as the broader ADR space fell in anticipation of the results at China’s Party Congress.

However, the risks involved in the put being honored were driving the notes lower on Monday.

Nio’s 0% convertible notes due 2026 were among the hardest hit with the notes contracting 5 points dollar-neutral.

The 0% convertible notes were changing hands at 80.5 versus an equity price of $9.22 on Monday.

There was $6 million on the tape.

Nio’s equity traded to a high of $10.03 and a low of $8.38 before closing the day at $9.45, a decrease of 15.63%.

Li Auto’s 0.25% convertible notes due 2028 sank 6 points outright and contracted 4 points dollar-neutral in heavy volume.

The notes were seen at 82.5 versus an equity price of $14.41 in the late afternoon.

There was $8 million in reported volume.

Li’s equity traded to a low of $12.52 and a high of $16.11 before closing the day at $14.68, a decrease of 17.39%.

“Yikes,” a source said.

In sympathy

While based in Singapore, Sea’s 0.25% convertible notes due 2026 were also lower in heavy volume.

The 0.25% notes fell 1.5 points outright as equity shrugged off losses to end the day with gains.

The notes were trading at 67 versus an equity price of $46.04 in the late afternoon.

The yield on the notes approached 11%.

There was $11 million in reported volume.

Sea’s equity traded to a low of $42.71 and a high of $47.02 before closing the day at $47.01, an increase of 1.8%.

Monday marked the lowest level for the notes since the $2.875 billion issue priced at par in September 2021.

Mentioned in this article:

Li Auto Inc. Nasdaq: LI

Nio Inc. NYSE: NIO

Pinduoduo Inc. Nasdaq: PDD

Sea Ltd. NYSE: SE

ZTO Express NYSE: ZTO

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