Nio convertibles trade ‘ugly’; Tesla conversion hopes dim; Wright Medical contracts

By Abigail W. Adams

Portland, Me., Jan. 31 – The first new convertible notes of the week hit the secondary space on Thursday and tanked on their market debut.

Nio Inc. priced $650 million of five-year convertible notes after the market close on Wednesday.

The deal had several complications, which resulted in it pricing wide of initial price talk and seeing a large contraction in the secondary space, sources said.

While the Shanghai-based electric car manufacturer’s first convertible notes offering plummeted, Tesla Inc.’s 0.25% convertible notes due March 1 were trading at par with hopes for conversion of the notes diminished.

The market has been focused on the upcoming maturity of the 0.25% convertible notes.

However, the maturity of SolarCity Corp.’s 1.625% convertible notes due Nov. 1, 2019 is also looming with the notes beginning to attract some attention, a market source said.

Wright Medical Group NV’s 1.625% convertible notes due 2023 were contracting following an exchange which increased the outstanding amount of the notes by $120.22 million.

ServiceNow Inc.’s 0% convertible notes due 2022 saw high-volume activity with the notes making large outright gains alongside stock following its fourth-quarter earnings report.

Nio trades ‘ugly’

Nio’s newly priced convertible notes hit the secondary space on Thursday with the notes trading “ugly,” a market source said.

Nio priced $650 million five-year convertible notes at par after the market close on Wednesday in line with revised price talk with a coupon of 4.5% and an initial conversion premium of 27.5%.

Price talk was widened to 4.5% with an initial conversion premium of 27.5% during bookbuilding from the initial talk of a coupon of 3.5% to 4% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The new notes traded down out of the gate, despite a surge in Nio’s stock.

They were changing hands around 99 soon after the opening bell and traded down to 97 a little over one hour into Thursday’s session, according to a market source.

The notes traded to a low of 96.5 and were changing hands around 98 in the mid-afternoon.

They were contracted as much as 5 points on a dollar-neutral basis, a market source said. More than $31 million of the bonds were on the tape by the mid-afternoon.

The outright bids for the new convertible notes were extremely low.

While the convertible notes sank in the secondary space, Nio stock saw large gains on Thursday.

Stock closed Thursday at $7.88, an increase of 5.63%.

“It’s really unusual for something to trade so ugly with stock up,” a market source said.

The fact price talk was widened and the deal was not downsized was also rare.

The deal was heard to be one of the most complicated deals long-time market players had ever been privy to, a market source said.

In connection with the pricing, Nio entered into capped call transactions and zero-strike call option transactions.

The zero-strike call options were essentially a borrow facility. With no borrow available outside of the facility, there was limited hedging of the notes, a source said.

The deal had a lot of hair on it, one source said. There were several unusual aspects to it, which contributed to its lackluster performance in the secondary space, another source said.

Many considered the company to be a knock-off of Tesla.

Conversion dreams

While Nio’s new convertible notes dominated trading activity, Tesla’s 0.25% convertible notes due March 1 continued to change hands at or just below par, sources said.

The notes were trading as if they no longer had any hope of conversion, a market source said. Tesla stock was largely flat following its fourth-quarter earnings report.

Stock closed Thursday at $307.13, a decrease of 0.53%.

The 0.25% convertible notes entered into their averaging period on Wednesday.

For every day the stock trades around $300 it would have to surpass $420 in order to exceed the $359 conversion price on the notes by the time of their maturity, a market source said.

However, Tesla announced that it would be able to comfortably cover the $920 million principal amount outstanding of the 0.25% convertible notes in cash upon their maturity.

While focus has rested on the 0.25% convertible notes, the maturity of SolarCity’s 1.625% convertible notes due Nov. 1, 2019 is also looming.

There is about $566 million principal amount of the 1.625% notes outstanding, according to Trace data.

The notes, which typically see light trading volume, have started to garner some attention. The notes have been quoted at 94.5 bid, 95 offered for the past few days.

About $5 million of the bonds changed hands during Thursday’s session with most trades at 94.75.

Tesla reported mixed fourth-quarter results. While Tesla missed on the bottom line with non-GAAP earnings per share of $1.93 versus analyst expectations of $2.08, the electric car manufacturer beat on the top line with revenue of $7.2 billion versus analyst expectations of revenue of $7.1 billion.

Cash and cash equivalents were $3.69 billion as of Dec. 31, 2018.

Wright Medical contracts

Wright Medical’s 1.625% convertible notes due 2023 were contracting in the secondary space following an additional privately negotiated exchange with holders of the company’s 2% notes due 2020.

The exchange raised the principal amount of the 1.625% notes by $120.22 million.

Following the exchange, there is now $795.22 million principal amount of the 1.625% convertible notes outstanding.

The 1.625% notes were active on Thursday with the notes contracting 0.75 point dollar-neutral.

“There’s more of them out there,” a market source said.

Wright Medical stock closed Thursday at $29.84, a decrease of 0.43%.

The exchange came with a call spread.

With the company repeatedly pushing out the maturity of their convertible notes and raising capital, there has previously been speculation there may one day be a sale of the company, a market source said.

However, the company is essentially announcing it is not for sale by entering into the convertible note hedge transactions, a market source said.

ServiceNow active

ServiceNow’s 0% convertible notes due 2022 were second only to Nio in trading volume in the secondary space on Thursday with the notes making large outright gains alongside stock following its fourth-quarter earnings report.

However, the deep-in-the-money convertible notes were largely moving with stock.

The 0% convertible notes rose 20 points outright to trade at 170 early in the session. The notes came in alongside stock as the session progressed to close the day at 166.

ServiceNow stock traded as high as $228.41 during Thursday’s session but closed the day at $220.02, an increase of 13.41%.

ServiceNow reported non-GAAP earnings per share of 77 cents versus analyst expectations of earnings per share of 64 cents.

However, revenue was $715.4 million, which missed analyst expectations of $717.8 million.

Mentioned in this article:

Nio Inc. NYSE: NIO

ServiceNow Inc. NYSE: NOW

Tesla Inc. Nasdaq: TSLA

Wright Medical Group NV Nasdaq: WMGI

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