iQIYI offering upsized, looks cheap; DexCom, Liberty Media expand; Ensco notes active

By Abigail W. Adams

Portland, Me., Nov. 29 – The convertibles primary market continued to roll out new deals with the Nov. 26 week poised to be the highest volume week for new paper in the fourth quarter.

After pricing $1.23 billion prior to the market open on Wednesday, an upsized $600 million deal is on deck for after the market close on Thursday.

iQIYI Inc. plans to price an upsized $600 million of five-year convertible notes after the market close on Thursday.

The deal looked “crazy cheap,” based on underwriters’ assumptions, a market source said.

However, some sources were skeptical about the company.

Meanwhile, the new paper to hit the market on Wednesday continued to perform well.

Liberty Media Corp.’s newly priced 2.25% exchangeable debentures due 2048 and DexCom Inc.’s 0.75% convertible notes due 2023 continued to expand on a dollar-neutral basis, sources said.

Outside of the recent issues, Ensco plc’s 3% convertible notes due 2024 saw active trading on Thursday with a large seller in the market.

Splunk Inc.’s two-tranches of convertible bonds also saw some activity with the notes expanding slightly dollar-neutral.

IQ upsizes

iQIYI plans to price an upsized $600 million offering of five-year convertible notes after the market close on Thursday.

Price talk is for a coupon of 3.25% to 3.75% and an initial conversion premium of 40% to 45%.

The greenshoe was also upsized to $90 million from $75 million.

Underwriters are marketing the deal with a credit spread of 350 basis points over Libor and a 40% vol., a market source said.

Using those assumptions, the deal modeled up to 10 points cheap at the midpoint of talk, the source said.

The deal looked “crazy cheap,” assuming a regular borrow, a market source said.

However, the borrow is tough on the Beijing-based online entertainment company’s American Depositary Shares.

The borrow cost is about 4%, a source said.

Factoring in the 4% borrow, the deal modeled about 4 points cheap, another source said.

iQIYI’s majority shareholder is search giant Baidu Inc., a $65 billion market cap company, which may make the convertible note offering more appealing, a market source said.

However, it does not appear that the notes will be guaranteed by Baidu, another source said.

The three-year put on the notes also increases their value, the source said.

However, there were drawbacks to the deal.

The Beijing-based company was cause for concern for some sources due to the lack of transparency around American Depositary Shares and continued tensions between China and the United States.

The company also has negative gross margins, a source said.

The premium also seemed high considering the difficulty with the borrow, another source said.

However, with the deal upsized, it appeared to be in demand.

Liberty Media expands

Liberty Media’s newly priced 2.25% exchangeable debentures due 2048 remained active and continued to expand in the secondary space.

“They moved up once they got out of their own way,” a market source said.

The new notes, which are exchangeable into shares of Live Nation Entertainment, Inc., were seen trading between 102.625 and 103.25 early in Thursday’s session and pushed past 104 on an outright basis later in the afternoon.

They were expanded another 0.5 point dollar-neutral on Thursday after expanding 1.25 points on their market debut Wednesday.

Live Nation stock closed Thursday at $55.91, an increase of 1.41%.

The 2.25% exchangeables priced at a discount of 99.5 and well wide of initial talk for a coupon of 1.25% to 1.75%.

“The market did a good job at pushing back on some ugly terms,” a market source said.

Underwriters were marketing the deal with a credit spread of 225 bps over Libor and a 30% vol., sources said.

With the revised pricing, the deal modeled up to 6 points cheap.

However, given its current level in the secondary space, the market appeared to think a wider credit spread was warranted, a source said.

DexCom Day 2

DexCom’s 0.75% convertible notes due 2023 also continued to expand during their second day in the market.

The 0.75% notes were trading north of 103 in the late afternoon and expanded another 0.25 point dollar-neutral, sources said.

DexCom stock closed Thursday at $129.96, an increase of 4.22%.

The 0.75% notes closed Wednesday just south of 101 and were expanded about 0.625 point dollar-neutral on their market debut.

Ensco active

While focus remained on the new paper, some outstanding convertible notes also saw high-volume trading activity on Thursday.

Ensco’s 3% convertible notes due 2024, an issue that is typically slow to trade, saw some action with a large seller in the market, a source said.

While the 3% notes were seen trading at 81.125 early in the session, they were weaker going into the afternoon to trade at 80.875.

Ensco stock closed Thursday at $6.15, an increase of 1.49%.

With the conversion premium over 500%, the notes have little conversion value.

The issue is among a growing number of convertible notes to trade with a yield to maturity of above 7%.

Splunk improves

Splunk’s two tranches of convertible notes were also actively traded on Thursday.

Splunk’s 0.5% convertible notes due 2023 rose 1.5 points outright to trade just north of 96 in the late afternoon, a market source said.

Splunk’s 1.125% convertible notes due 2025 also climbed about 1.5 points outright to trade at 95.625 in the late afternoon.

Both tranches saw a slight dollar-neutral expansion, a market source said.

Splunk stock closed Thursday at $101.63, an increase of 2.51%.

Mentioned in this article:

DexCom Inc. Nasdaq: DXCM

Ensco plc NYSE: ESV

iQIYI Inc. Nasdaq: IQ

Live Nation Entertainment, Inc. NYSE: LYV

Splunk Inc. Nasdaq: SPLK

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