Zendesk convertible notes in focus on buyout, outrights win, hedges lose; LendingTree down

By Abigail W. Adams

Portland, Me., June 24 – It was a firm end to a volatile week in the convertible bond secondary space as equity markets saw another strong session and closed with the first weekly gain of the month.

Indexes continued to rally as the market dialed back its rate-hike forecast although sources were skeptical whether the rally would have staying power.

The Dow Jones industrial average closed the day up 823 points or 2.68%, the S&P 500 index closed up 3.06%, the Nasdaq Composite index closed up 3.34% and the Russell 2000 index closed up 2.94%.

There was $70 million in reported volume about one hour into the session and $460 million on the tape about one hour before the market close.

Zendesk Inc.’s convertible notes dominated activity in the secondary space following news the company would be going private following a long-speculated takeover.

While outright holders of the company’s 0.625% convertibles due 2025 were major winners on the news, hedge holders of the 0.25% convertible notes due 2023 were major losers with the notes contracting several points dollar-neutral.

Li Auto Inc.’s 0.25% convertibles due 2028 gained alongside the company’s equity in active trading after the Beijing-based electric vehicle manufacturer reported order numbers for its SUV model.

Li Auto has seen strong positive momentum on hopes China will extend a subsidy for electric vehicles.

While equity markets surged on Friday, LendingTree Inc.’s shares tanked on downwardly revised guidance, which dragged down the lending platform’s 0.5% notes due 2025.

Zendesk’s winners and losers

Zendesk’s convertible notes were in focus on Friday after the software company’s long-speculated and debated takeover transpired.

Outright accounts were major winners on the news with both the 0.625% convertible notes due 2025 and 0.25% convertible notes due 2023 making large gains.

However, hedge holders lost out with the 0.25% convertible notes seeing a multipoint contraction.

The 0.625% convertible notes also contracted on the news but held up well comparatively, sources said.

The 0.625% convertible notes jumped 5.25 points outright to trade on a 97-handle.

They were changing hands at 97.875 versus a stock price of $74.31 in the late afternoon.

The notes contracted about 0.25 point dollar-neutral.

The notes dominated the tape with large outright sellers in the market. There was $45 million in reported volume about one hour before the market close.

The 0.25% convertible notes jumped about 10 points outright.

They were changing hands at 119.125 versus a stock price of $74.54 in the late afternoon.

The notes tanked on a dollar-neutral basis contracting as much as 5 points on swap, a source said.

There was $10 million in reported volume.

Zendesk stock traded to a high of $75.50 and a low of $73.50 before closing the day at $74.17, an increase of 27.99%.

Following media reports Zendesk was zeroing in on a sale, the company formerly announced it had entered into a definitive agreement with Permira and Hellman & Friedman LLC to be acquired in an all-cash transaction that values the company at $10.2 billion.

Under the terms of the agreement, shareholders will receive $77.50 per share, representing a 34% premium over the company’s closing stock price on June 23, according to a company news release.

The sale will trigger a change-of-control par put for the 0.625% notes, a source said.

Zendesk’s stock price and convertible notes have whipsawed amid longstanding speculation and debate about the software company as a buyout target.

Li gains

Li Auto’s 0.25% convertibles due 2028 were making gains alongside the issuer’s equity after the electric vehicle manufacturer announced order numbers for its SUV model.

The 0.25% convertible notes rose 3.5 points outright with its equity up about 4%.

The 0.25% convertible notes were changing hands just shy of 153.75 versus an equity price of $50.49 in the late afternoon.

There was $12 million in reported volume.

Li’s American Depositary Shares traded to a high of $41.49 and a low of $38.90 before closing the day at $40.79, an increase of 3.95%.

The electric vehicle manufacturer’s stock has surged 10.84% over the last two sessions with shares also on the rise on Thursday due to speculation China will extend its subsidy on electric vehicles.

LendingTree under pressure

While equities were strong on Friday, LendingTree became the latest company to issue a warning about the macro impact of rising rates on its balance sheet.

The lending platform’s 0.5% convertible notes due 2025 sank alongside stock after the company issued downwardly revised guidance.

The 0.5% convertible notes were down almost 7 points outright.

They were changing hands at 68 in the late afternoon with the yield now 13.695%, according to a market source.

There was $12 million in reported volume.

LendingTree stock traded to a high of $51.99 and a low of $49 before closing the day at $50.55, a decrease of 7.87%.

LendingTree lowered its second-quarter guidance to $259 to $264 million from its previously expected $283 to $293 million and placed its 2022 guidance under review, the company said in a press release.

Rising mortgage rates have adversely affected the company’s home segment.

Mentioned in this article:

LendingTree Inc. Nasdaq: TREE

Li Auto Inc. Nasdaq: LI

Zendesk Inc. NYSE: ZEN

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