Wright Medical makes 'fantastic' debut; Navistar hangs in amid lower shares; Annaly active

By Rebecca Melvin

New York, Aug. 23 - Wright Medical Group Inc.'s newly priced 2% convertibles due 2017 surprised on the upside on their debut in the secondary market on Thursday, gaining about 3 points on a dollar-neutral, or hedged, basis after the Arlington, Tenn.-based orthopedic medical device company priced an upsized $260 million of the convertibles in line with revised talk.

"I think it did better than most expected, especially the hedged funds," a New York-based trader said.

A second trader, noting that the underlying shares were actually lower on the day, said, "It did very well."

Tight supply and strong demand was cited for the strong performance: "there is a thirst for coupon and yield and a thirst for more convertibles," a New York-based portfolio manager said.

Navistar International Corp.'s convertibles slipped outright but were trading well in comparison to the underlying shares of the Lisle, Ill.-based truck and engine maker.

The Navistar convertible is fairly busted, so it's not going to react very much to stock moves. But shares were much lower after the company lost out to Oshkosh Corp. on a contract to develop a lightweight tactical vehicle for the U.S. military.

Annaly Capital Management Inc.'s convertibles, which have been active of late, were steady on Thursday, in line with the underlying shares of the New York-based real estate investment trust.

Annaly priced a $750 million deal last spring of 5% convertibles at a discount to par of 98, and the paper traded at about 100.7 on Thursday.

Overall, the convertible market was quiet, but valuations have strengthened of late, a trend that is three or four weeks in the making and in tandem with small cap stocks outperforming large cap stocks, which is helpful for the convertible market.

"Smaller cap outperforming the larger caps helps to a certain extent," a New York-based convertibles analyst said.

In the first part of the year, large caps were outperforming small caps, but that trend reversed three or four weeks ago, with small caps now outperforming, the analyst said.

From a convert valuation standpoint, the trend has helped turn around the market from being 1.3% to 1.4% cheap at the trough in June, to being back to fair value, he said.

Things are looking up. For the month to date, the convertible market has outperformed the S&P 500 stock index, with the S&P up about 2.4% and convertibles up 2.5% or a little more.

On the other hand, the credit market is as open as ever and that is a negative for the convertible market, the analyst said.

On a year-to-date basis, the S&P is still outperforming the convertible market.

Wright Medical makes debut

Wright Medical's new 2% convertibles due 2017 were quoted at 102.75 bid, 103.125 offered versus an underlying share price of $19.60 slightly after midsession.

"On a swap basis, they did fantastic," a trader said. Shares of the medical device maker opened lower, however, and traded essentially sideways from that level.

Shares ended the day down 19 cents, or nearly a percentage point, at $19.75.

The trader said that he thought the bonds would be trading on about a 60% delta hedge.

Sources said that the reason behind the strong performance was supply and demand, or a lack of new paper that is in demand by many players.

Wright Medical's existing 2.625% convertibles due 2014, the remaining $29 million of which will be taken out by proceeds of the new deal, were inactive and were described as being the opposite of fantastic.

The new Wright Medical convertible was plus 2 points bid in the gray market as the day ended on Wednesday, and the paper priced later that day.

The deal was increased from the originally announced $200 million and priced in line with revised talk for a 2% coupon and a 27.5% initial conversion premium. Talk started at 2.25% to 2.75% with an initial conversion premium of 22.5% to 27.5%, according to market sources.

An analyst said that the company is reasonably profitable and credit spreads put on it were 600 basis points and lower.

"It's good; I like this story. Although as an outright, I don't know if I would be in," a West Coast-based trader said on Wednesday before pricing.

The conversion price on the new paper is $25.44, and the conversion ratio is 39.3140.

There is contingent conversion for cash until Feb. 15, 2017, and the notes are freely convertible after that date until maturity on Aug. 15, 2017. The contingent conversion threshold is 130%.

The offering has a $40 million greenshoe, increased from the original $30 million.

J.P. Morgan Securities LLC is the bookrunner of the Rule 144A offering, with SunTrust Robinson Humphrey Inc. and US Bancorp acting as co-managers.

The bonds are non-callable for life with no puts.

Wright Medical entered into privately negotiated convertible note hedge and warrant transactions that raise the effective conversion level from the issuer's perspective to a 50% premium.

About $130 million of the proceeds will be used to pay an outstanding term loan under Wright Medical's senior credit facility and a portion of the proceeds will fund the cost of the convertible note hedge transactions.

The balance of the proceeds will be used to fund up to $30 million of the company's 2014 convertible senior notes and for general corporate purposes, including acquisitions.

Navistar holds in

Navistar's 3% convertibles due 2014 traded early at 90.3 bid, 90.625 offered on Thursday, with Trace recording a print at 90.326, which was down from 90.875 on Wednesday. Later the paper was indicated down at 89.5 with lower shares, but it wasn't known if it traded at that level.

The Navistar convertible was "trading well," a trader said, especially compared to the underlying shares.

The shares declined through the session, ending down $1.78, or 7.2%, at $23.13.

They were losing altitude on the day after the company lost out on a contract to Oshkosh to develop a lightweight military vehicle.

The convertible, which has a 20% delta and a $50 strike price, is busted but only has two years left to maturity.

"The stock is really not going to affect the convertibles apart from the refinancing," an analyst said.

The Navistar bonds hit a low of about 85 on July 10.

Annaly in trade of late

Annaly's 5% convertibles due 2015, which priced last spring at a discount to par of 98, traded at 100.625 to 100.7 on Thursday, which was unchanged from Wednesday, an analyst said.

The Annaly 4% convertibles due 2015 traded at 126.375, also little changed.

Both issues have been trading in recent weeks. The interest is mostly outright and stems from the stock's high dividend yield. The yield on the new paper is 4.75% to 4.8%.

The new bonds, or 5% convertibles, have full dividend protection above 55 cents per quarter, and the 4% convertibles have full dividend protection above zero.

"It bumps up the conversion ratio on the 4s every time they pay a dividend," an analyst said.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Navistar International Corp. NYSE: NAV

Wright Medical Group Inc. Nasdaq: WMGI

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