Morning Commentary: iQIYI convertible notes gain on closing of private placement

By Abigail W. Adams

Portland, Me., Jan. 3 – As equity markets launched the New Year with continued volatility, the convertibles secondary space saw a quiet start to the trading session with one name the exception.

iQIYI, Inc.’s 2% convertible notes due 2025 made large gains in active trading following news the Beijing-based streaming service had closed on the $500 million convertible note private placement announced in August.

The 2% notes rose 4 points outright to trade at 85.25 versus an equity price of $5.50 early in the session, according to a market source.

The yield to put narrowed to 74.375%.

There was $7 million in reported volume.

While the notes are largely a yield play, iQIYI’s American Depositary Shares were changing hands at $5.99, an increase of 13.43%, shortly before 11 a.m. ET.

iQIYI’s capital structure was boosted after the company announced the completion of its $500 million private placement of 6% convertible notes due 2028 with an affiliate of PAG Asia.

iQIYI’s capital structure was lifted when the private placement was initially announced in August 2021 with the 2% convertible notes trading as high as a 90-handle.

However, heavy selling in December eliminated the gains made from the private placement announcement.

The 2% notes sank to a 73-handle in mid-December with large sellers in the market.

However, the notes pared their losses to close 2022 on an 81-handle.

The notes have long been a yield play with the 2% notes putable on April 1, 2023.

The private placement helped bolster investor confidence in the company’s ability to honor the put, sources previously said.

Meanwhile, the secondary space was quiet outside of iQIYI with $84 million in reported convertibles trading volume about one hour into the session.

While there was a wide range of names on the tape, no other issue saw more than $5 million in reported volume.

Equity indexes launched the year with continued volatility – an indication that the wild market swings of 2022 will continue into the foreseeable future.

After opening with strong gains, indexes quickly sank into negative territory although they pared their losses shortly before 11 a.m. ET.

The Dow Jones industrial average was down 18 points, or 0.05%, the S&P 500 index was down 0.16%, the Nasdaq Composite index was down 0.43% and the Russell 2000 index was down 0.09% shortly before 11 a.m. ET.

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