Wright Medical jumps outright, contracts on swap; PennyMac to price exchangeables

By Rebecca Melvin

New York, Nov. 4 – A pair of Wright Medical Group NV’s bonds jumped outright in active trade on Monday but contracted on a swap basis after news that that medical device maker has agreed to be acquired by Stryker for about $4.7 billion, or $30.75 per share in cash, representing a premium of 52%.

The Wright Medical 2.25% convertibles due 2021 traded up more than 18 points outright to 140.4 in heavy volume. But on swap, they were down 2 points to 3 points, according to one New York-based source, and as much as 4 points, according to a second source.

About $26 million of the 2.25% bonds had changed hands by mid-afternoon, topping the most actives convertibles list, according to Trace data.

Wright Medical’s 1.625% convertibles due 2023 also traded actively and gained more than 6 points outright to almost 104, but they contracted by more than 4 points on a dollar-neutral basis.

“The 1.625% tranche is mostly outright held, so it shouldn’t be widespread pain for ‘hedgies’ there, but the 2.25% [convertible] has a lot of hedge players, and it will be annoying to take the markdown. Outrights are happy obviously,” one source said.

Elsewhere, PennyMac Corp. announced ahead of the market open that it planned to price $200 million of five-year exchangeable senior notes after the market close.

During the session, the price talk for the PennyMac deal was revised to a 5.5% coupon with an initial exchange premium of 10%. Initially, the deal was being talked to yield 4.75% to 5.25% with an initial exchange premium of 10% to 15%.

One source said the revision wasn’t surprising. “I thought 15% vol. was too much. This is a 13% vol. name at best, which puts fair value at about 99.75 at the midpoint of old talk. Now it’s more like 102-ish with revised terms.”

The valuation was based on a credit spread of 425 basis points over Libor and 15% vol.

The company is a subsidiary of PennyMac Mortgage Investment Trust, which is guarantor of the notes.

J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are joint bookrunners of the Rule 144A offering, which has a $30 million greenshoe.

The proceeds of the notes, which are non-callable, are going to be used for general corporate purposes, including funding the investment activity of PennyMac and its subsidiaries, which may include investments in credit risk transfer securities, mortgage servicing rights, mortgage-backed securities and new products such as home equity lines of credit or prime, non-qualified mortgage loans, as well as the repayment of debt and working capital.

Wright Medical contracts

Wright Medical’s two bonds topped the most actives convertibles list on Monday, and the pricing climbed as shares surged, but for hedged players the moves were not favorable.

The Wright Medical 2.25% notes were lower by 2 points to 3 points or as much as 4 points dollar neutral, according to sources. The bigger loss is assuming they were being held on a delta in the low 60%. The delta moved to around 70% given the day’s action.

The Wright Medical 1.625% notes were down 4 points to 5 points, and the delta was a 40% and moved to around high 50s, a source said.

Under the terms of the agreement, Stryker will acquire all of the issued and outstanding ordinary shares, including the value of Wright’s outstanding convertible notes, for a total enterprise value of $5.4 billion. Stryker will commence a tender offer for all outstanding ordinary shares of Wright for $30.75 per share, in cash. The boards of directors of both Stryker and Wright have approved the transaction.

The closing of the transaction is subject to a number of international regulatory approvals, and is not expected to close until the second half of 2020.

The takeout price was based on the volume-weighted average closing price of Wright ordinary shares over the 30 calendar days ended Oct. 31, the last trading day prior to speculation that Wright was exploring a sale of the company, according to the company news release.

The company’s shares surged 32% to close at $29.04 on Monday.

Stryker will not keep the convertibles outstanding. “They will all come out because the consideration is 100% cash,” a market source said.

Wright Medical is an orthopedic medical device company based in Amsterdam following its merger with Tornier NV.

Mentioned in this article:

PennyMac Mortgage Investment Trust NYSE: PMT

Wright Medical Group Inc. Nasdaq: WMGI

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