Morning Commentary: Rivian convertibles a bloodbath on debut, recover in later trading

By Abigail W. Adams

Portland, Me., Oct. 6 – It was an active morning in the convertibles secondary space as $1.5 billion in new supply made its aftermarket debut on a volatile day for equities and Treasuries.

Rivian Automotive Inc. priced $1.5 billion of seven-year green convertible notes after the market close on Thursday at par at the cheap end of talk with a coupon of 3.625% and an initial conversion premium of 27.5%.

Price talk was for a coupon of 3.125% to 3.625% and an initial conversion premium of 27.5% to 32.5%.

The large offering was the first convertible deal to come since markets repriced for a higher-for-longer rate environment.

While the offering looked attractive and carried a much-coveted high vol. for hedge funds, the EV maker’s fundamentals were suspect.

Rate risks are high for the company, which will be in need of future capital raises to sustain its operations, a source said.

The offering also clocked the company’s market cap with a 22% drop in stock during Thursday’s session, which wiped out about $6 billion in value.

While the company could not have been happy about the destruction to its stock, the capital raise was most likely an example of the company tapping the market while it was still open.

“Do it when you can, not when you have to,” a source said.

Rivian’s new convertible notes saw a brutal start in the aftermarket with stock off another 5% pre-open as the latest U.S. nonfarm payrolls report sunk equity and bond markets.

The surprise increase in job growth sparked heavy selling in equities and Treasuries as markets grappled with the increased likelihood of an additional rate increase and a higher-for-longer rate scenario.

While a low open, equity indexes recovered to turn mixed shortly before 11 a.m. ET while Treasury yields remained near multi-decade highs.

The Dow Jones industrial average was down 68 points, or 0.18%, the S&P 500 index was down 0.15%, the Nasdaq Composite index was up 0.12% and the Russell 2000 index was down 0.48% shortly before 11 a.m. ET.

There was $100 million in reported volume about one hour into the session with Rivian’s new notes accounting for more than one-third of the total volume in the space.

The notes traded down to a 96-handle pre-open.

“Rivian = bloodbath,” a source said.

However, the notes pared their losses as stock recovered alongside broader equity markets.

The notes were trading at 97.875 versus a stock price of $17.78 about one hour into the session, a source said.

They continued to improve with the notes trading around 99.5 with stock off about 0.5% shortly before 11 a.m. ET.

The notes move on a heavy hedge of about 85% and were contracted slightly dollar-neutral, a source said.

Rivian’s stock was trading at $18.25, a decrease of 0.08%, shortly before 11 a.m. ET.

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