Morning Commentary: Enovis convertible notes on deck; Semtech launches, pulls offering

By Abigail W. Adams

Portland, Me., Oct. 19 – The convertibles primary market awakened on Thursday with one deal launching before the window of opportunity for new issuance officially drew to a close.

Enovis Corp. plans to price $400 million of five-year convertible notes after the market close.

The deal looked optically attractive and modeled cheap based on underwriters’ assumptions.

Semtech Corp. also launched a $250 million offering of five-year convertible notes pre-open on Thursday.

While there was widespread interest in the deal, it turned out to be a “private Semtech,” sources said.

J.P. Morgan Securities LLC was running the 4a2 private placement, which was limited to a small group of investors.

However, with Semtech’s stock down 22% on the heels of the offering, word on the street was that the deal got pulled.

The new deal activity comes during the traditional lull in primary market activity as earnings get underway.

The lull in activity has been compounded by a badly bruised stock and bond market that is once again pricing in additional rate increases and a higher for longer rate environment.

The destruction in small cap stocks and growth companies with high cash burn rates may be a deterrent for future primary market activity with traditional convertible issuers getting squeezed by the high cost of capital.

However, the rate environment may also stimulate primary market activity with crossover issuers continuing to turn to the convertible market, which remains comparatively cheap, sources said.

Meanwhile, the secondary space was at a crawl early Thursday with attention firmly focused on the new deal on deck.

Equity indexes were mixed at the open and dragged lower as the session progressed.

The Dow Jones industrial average was down 137 points, or 0.41%, the S&P 500 index was down 0.22%, the Nasdaq Composite index was up 0.03% and the Russell 2000 index was down 0.54% shortly before 11 a.m. ET.

There was $31 million in reported volume about one hour into the session with no name seeing more than $3 million in reported volume.

Enovis eyed

Enovis plans to price $400 million of five-year convertible notes after the market close with price talk for a coupon of 3.625% to 4.125% and an initial conversion premium of 27.5% to 32.5%.

The deal was heard to be in the market with assumptions of 350 basis points over SOFR and a 26% vol.

Using those assumptions, the deal looked a couple points cheap at the midpoint of talk and was optically attractive, a source said.

The deal is unique in that it is coming in support of M&A activity and carries a special call provision.

The medical technology company is in the process of completing its $840 million acquisition of Italy-based surgical implant manufacturer LimaCorporate SpA.

Proceeds, together with borrowings under a new term loan and cash on hand, will be used to fund the cash purchase price of the acquisition.

The notes will be redeemed at 101 plus accrued interest if the company’s acquisition of LimaCorporate is not consummated by June 30, 2024.

They are otherwise non-callable.

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