Ford, GM converts slip on sales; Delta off but in holding pattern; Novell retreats; two deals emerge

By Ronda Fears

Nashville, Aug. 3 - With crude oil at another fresh high of $44.15 a barrel, chatter of $45 or even $50 oil fueled worries already stirred by the terrorism scare looming in the financial markets. While stocks slid sharply on typical volume, convertible traders said the market was considerably softer but there wasn't an indiscriminate sell-off.

Convertible arbitrageurs cheered a flat Treasury market - with yields even ticking slightly lower - and a spike in volatility.

"The bond market and a nice bump in vol [volatility] saved the day," one convert trader at a huge hedge fund in New York said. "Otherwise, it's pretty ugly on the tape. Today it was a sea of red. We're not seeing a lot of offers but we're not getting a lot of bids either."

The impact of the astronomical rise in oil prices is widespread throughout the economy but is immediately a slam to the transportation sector which is already facing troubles from several areas. Ford Motor Co. and General Motors Corp. were both lower on their sales figures for July, which one sellside dealer said "weren't exactly awe-inspiring."

Delta Air Lines Inc. and the field of airline paper were marked down with the underlying stocks, but traders said Delta's converts were mostly in "a holding pattern or finding buyers," on an anticipated restructuring in or out of bankruptcy court.

Perhaps surprisingly, there was not a lot of activity in oil paper, market sources said.

"We haven't traded any of my favorites today," one sellside source said, mentioning Halliburton Co., BJ Services Co. and Nabors Industries Ltd.

While there wasn't wholesale selling going on, traders said there was pretty heavy selling in the telecom sector, including telecom equipment names like Lucent Technologies Inc. and Corning Inc., on pressure as AT&T Corp. was cut to junk by Standard & Poor's. That completed the former telecom monopoly's descent to speculative-grade as Moody'a had cut AT&T to junk on Friday.

Also of note, Novell Inc. was in retreat after an "overly optimistic" run up on Monday after Sun Microsystems Inc. president Jonathan Schwartz mentioned Novell in the context of Sun looking for acquisitions. Novell's new 0.5% convert rose 2.5 points Monday to about 95.5 on the chatter, but then gave some of that back Tuesday to end at 94.375 bid, 94.875 offered.

After the close a couple of new deals emerged on the primary market front, which has been very quiet for the past month.

Henry Schein, SFBC launch

Henry Schein Inc. launched $200 million of contingent convertibles for Wednesday's business and SFBC International Inc. also had a small deal afloat as well, for Thursday.

The Henry Schein offering of 30-year convertibles was talked to yield 2.5% to 3.0% with a 41% to 46% initial conversion premium.

The senior notes have a 130% contingent conversion trigger with no waiver provisions in the event of new accounting rules for those structures, as with the recent Ocwen Financial Inc. issue. In the Ocwen issue, the company has the option to waive the CoCo feature pending a final ruling by the Financial Accounting Standards Board on the treatment of potential dilution from CoCo converts in reporting earnings.

A task force of the FASB has tentatively recommended a change in accounting rules for CoCo convertibles that would require issuers of those securities to report diluted EPS even if the CoCo trigger has not been hit, plus present historical EPS figures on an if-diluted basis.

The task force is scheduled to meet again Sept. 29 and 30 to discuss the matter.

Henry Schein shares closed Tuesday down $1.27, or 1.9%, to $65.73. In after-hours trading on the convertible news, the stock was down another $2.73, or 4.15%.

SFBC International is planning to sell $100 million of 20-year convertible notes talked to yield 2.25% to 2.75% with a 30% to 35% initial conversion premium. It will be sold on swap with up to $25 million of proceeds going to buyback stock from short sellers participating in the convertible offering.

SFBC shares closed Tuesday down $1.06, or 3.03%, to $33.94 and in after-hours trading were off another 12 cents, or 0.35%.

Ford, GM lower, but parked

Ford and GM reported that July was the best month for auto sales so far this year but the numbers still trail behind those a year ago, and were seen as an ill omen with oil prices pushing gasoline prices higher and much of the gain in sales due to incentives.

Ford posted a 4% decline in July sales while GM said sales were 3% lower in July than a year ago.

"With the talk of the high inventories and ongoing incentives you just can't see where the profits are going to come from except in financing these bargain-basement sales," said a buyside trader.

"I think probably there's more opportunity to buy on the weakness and realize some relative gains in Ford but there was more interest probably in GM today."

Still, although the converts of both Ford and GM were lower, he said there was not a lot of volume in those issues except for GM's fattest coupon convert which was actually finding some buyers on the weakness.

GM's 6.25% convert was off about 0.125 point to 28. On the New York Stock Exchange, that GM issue saw volume of 2.52 million bonds versus the three-month running average of 1.15 million. The GM 5.25s were off by the same amount to close at 24.3 on very low volume. The GM convertible bonds were sold at a par of 25 to boost retail interest.

GM shares closed Tuesday down by 23 cents, or 0.53%, to $43.07.

Ford's 6.5% convertible preferred, with a par of 50, dropped a half-point on the day to 53.25, also in very low volume. Ford stock ended down by 34 cents, or 2.26%, to $14.71.

Airline paper loses 1-2 points

Among the most high profile decliners in the convertible universe Tuesday was the airline sector, but trading there was described as thin and considerably muted compared with what was going on in the underlying stocks.

"All the airlines stocks are getting crushed," said a sellside convert trader. "The converts are marked down, too, but there's really not been a lot of traffic in those names."

The ongoing spike in oil prices, which inevitably trickles down to fuel prices, was the biggest culprit. Crude oil futures struck a new high of $44.15 a barrel Tuesday on the New York Mercantile Exchange.

The converts of AMR Corp., parent to American Airlines Inc., lost about 0.75 to 1 point to the 65 to 75 area, the sellside trader said. AMR stock dropped 2.78%, or 23 cents, to $8.03.

Northwest Airlines Corp.'s converts were down by about a half-point to a full point in the 75 to 80 neighborhood, the dealer said. Northwest shares ended down by 1.97%, or 17 cents, to $8.46.

Continental Airlines Inc. converts also lost about a half-point to a full point to settle the day in the high-60s area, the dealer said. Continental shares dropped 24 cents, or 2.65%, to $8.81.

Then, there's the pilot pay issue, which Delta is neck deep in.

Delta holders just holding on

Delta's converts were a little weaker than its peers in the airline sector, losing 1 to 2 points, but traders said the issues were not very busy. Volume was not even average in the stock either, with the shares ending lower by 4.74%, or 24 cents, to close out the session at $4.82.

Delta's junk bonds also continued to retreat and were seen at the close down 1 point with the 8.3s of 2029 at 34.5.

"The common stock is finally realizing what bondholders have experienced," said a sellside trader. "The common will be $1 shortly."

It is sort of a situation where those holding the bonds are just holding on. The typical thinking in these types of situations, one buyside source commented, is that if Delta files bankruptcy then there would be the typical bankruptcy bidders step in, albeit at much lower levels than where the bonds are trading now.

"The converts are really the same, still a tad lower," the sellside trader said, "but the common will crap out soon. Any fix of the company will require a debt renegotiation."

That might not be much better than in a bankruptcy case, the buyside source said, because all the other bonds would be "re-fixed" too.

Delta bonds may be worth 60

If you are holding, then you may as well "sit out the storm," as the buyside source put it.

The sellside trader, too, said he would advise holding on, asserting Delta's convertible bonds "will turn out probably worth 60 in our opinion."

Thus, he believes buying or holding the converts in the 40s to 50s would be smart. He added, though, that he prefers the Delta 8% converts as opposed to the 2.875% converts, because "if all works out on the positive side their yield to put is a grand slam."

Key to Delta's survival, though admittedly even by the company not a total salvation, is the pilot wage concessions.

"It seems like the pilot union wants to drag out the inevitable [salary and wage decline] for as long as they can, but in the end something will have to give," the buyside source said. "I believe once everyone understands the significance of what's at stake and how these concessions impact their future, there may not be as much counter-productivity and maybe, just maybe, a positive resolution."

In any event, Delta is aiming to come up with a plan by the end of August.

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