Morning Commentary: Nio convertible notes offering eyed; Illumina notes remain active

By Abigail W. Adams

Portland, Me., Jan. 30 – With Tesla Inc. on the verge of reporting fourth-quarter earnings, which are slated to be announced post-close, market players were focused on the convertible notes offering of Tesla’s competitor Nio Inc.

Nio plans to price $650 million of five-year convertible notes after the market close on Wednesday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 27.5% to 32.5%.

Underwriters are marketing the deal with a credit spread of 600 basis points over Libor and a 40% vol., according to a market source.

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

However, the borrow on the Shanghai-based electric car manufacturer’s stock is difficult.

The deal comes with a call spread, in addition to zero-strike call option transactions.

The zero-strike call options is equivalent to a borrow facility and will ease the problems with the borrow, a source said.

Being conservative on the borrow and adding in 5 or 6 points to the assumptions lowers the fair value of the deal to 101, a market source said.

However, with the borrow facility the borrow may be around 2%, which would raise the fair value of the deal to 107, the source said.

Meanwhile, the secondary space was active with earnings related news jumpstarting trading activity.

There was more than $126 million on the tape a little over one hour into the session.

Illumina Inc.’s convertible notes were again major volume movers in the secondary space as stock dipped after an earnings miss.

Illumina’s 0.5% convertible notes due 2021 saw more than $13 million bonds change hands early in the session.

The notes were changing hands around 125.5. Illumina stock traded down to $271.78, a decrease of 4.73%, early Wednesday.

Illumina reported non-GAAP earnings per share of $1.32 versus analyst expectations for earnings per share of $1.36.

However, Illumina reported $867 million in revenue versus analyst expectations for $863 million in revenue.

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