Morning Commentary: iQIYI’s $1.05 billion convertibles on tap, existing notes active

By Abigail W. Adams

Portland, Me., March 26 – Despite the soft tape on Monday, the primary market launched a billion-dollar deal, which market players were focused on during Tuesday’s session.

iQIYI Inc. plans to price $1.05 billion of six-year convertible notes after the market close on Tuesday with a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

Underwriters were marketing the deal with a credit spread of 400 basis points over Libor and a 37% vol., according to a market source.

Using those assumptions, the deal modeled up to 9 points cheap at the midpoint of talk, a source said.

However, the borrow on iQIYI’s American Depositary Shares is expensive, which will reduce the cheapness of the deal.

Other sources pegged assumptions as 750 bps over Libor and a 45% vol. Even with a wider credit spread, the deal modeled about 3 points cheap, the source said.

The new offering from iQIYI is its second convertible note deal in less than six months. iQIYI priced a $750 million issue of 3.75% convertible notes due 2023 in November 2018.

The Beijing-based online entertainment service provider is a $17 billion market cap company and can get away with it, a source said.

The 3.75% notes were active in the secondary space with the notes coming in as the new offering was in the works.

The 3.75% notes were seen at 120.75 versus a stock price of $24.02 prior to the market open.

They were changing hands at 116.875 early in Tuesday’s session.

iQIYI stock was $23.18, a decrease of 3.5%, shortly before 11 a.m. ET.

The 3.75% notes were trading with a credit spread of 640 bps over Libor and a 45% vol., a market source said.

While equities were rebounding on Tuesday, sources were surprised to see such a large deal launch on Monday, given the conditions in the market.

With the yield curve between three-month Treasury bills and 10-year notes inverted, issuers may be worried about the future direction of the market.

There may be a rush to get deals done sooner rather than later when conditions may make issuing new convertibles more costly, a market source said.

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