Lear skids while GM, Ford driven up on tighter spreads in GMAC; America West up on merger deal

By Ronda Fears

Nashville, May 19 - Convertible players began to belly up to the table Thursday, picking off some ripe issues although onlookers were loath to say the market was well bid yet as June 30 redemptions were still casting a pall over the market.

"Buyers are coming in, feeling their oats again," remarked a sellside trader. "They are cleaning up the blocks of good quality converts; [thus] sellers are able to scale higher."

A buysider observed, however, that there is not a gigantic buying spree under way that would suggest the nadir in the market has been breached. "If we were seeing Citadel [the huge hedge fund based in Chicago] buying the ---- out of the market, then that would say something. We're not seeing that."

Rather, long-term believers are picking off down-trodden issues in a modest way, traders suggest. A couple of issues mentioned specifically were Fannie Mae and Gateway Inc., both with news on the tape Thursday.

Fannie's 5.375% perpetual convertible preferred edged up about 0.25 point to 92.75 bid, 93.25 offered while the stock added 4 cents to $56.54 even though there was another push to limit the mortgage firm's portfolio - a move that has been debated in Washington for months now.

Federal Reserve chairman Alan Greenspan criticized Fannie Mae and Freddie Mac on Thursday and urged Congress to cut their investment portfolios because he said they do not help Americans buy homes. His comments accentuate arguments before Congress to increase oversight of Fannie Mae and Freddie Mac following accounting problems that have led to huge profit restatements, as much as $11 billion in the case of Fannie.

Gateway convertibles also were slightly firmer after news early Thursday that founder and chairman Ted Waitt will retire. The 1.5% issue due 2009 was pegged at 67.5 bid and the 2% due 2011 at 63.25 bid, while the stock gained 2 cents to $3.23.

GM, Ford improve on spreads

General Motors Corp. got a nice bounce on some spread improvement stemming from tightening in GMAC credit default swaps, a sellside dealer said, and Ford Motor Co. piggybacked on that rise.

Volume was not that impressive with regard to GM, he said, but there was heavy buying in the Ford 6.5% convertible preferred, which shot up 0.875 point to 38.5 while the stock edged up 9 cents to $10.01.

GM's 6.25% convertible climbed 1 point to 20.625, the 5.25% issue rose 0.5 point to 16.625 and the 4.5s were up 0.25 point to 23.25 but none saw much action, he said. GM shares gained $1.14 on the day, or 3.61%, to $32.75.

Suppliers to the big automakers like American Axle & Manufacturing Holdings Inc. and Lear Corp., however, were under pressure from downgrades to the stock as well as renewed credit concerns stemming from the troubles at GM.

Lear slashed on downgrades

Seats and interior components maker Lear was particularly weak on analyst concerns regarding both the stock and credit. Lehman Brothers on Thursday cut its rating on Lear to underweight from equal-weight, and the shares dropped 74 cents, or 2%, to $36.42.

Lear's credits ratings, though still investment grade at Baa3/BBB-, are on negative watch or under review for possible downgrade, too. The 0% convertibles, issued at 36.106, lost a half-point on Thursday, a sellside trader said, to settle at 42.5 bid, 43 offered.

"The carnage in the automotive supplier sector has been so widespread that even the better operators have not been able to escape," said GimmeCredit analyst B. Craig Hutson. "Lear has seen its stock price drop 39% year to date and its bonds fall roughly 15 points following dismal first quarter results and a lower 2005 forecast."

Still, Hutson said he is "highly skeptical" that Lear will be able to achieve its 2005 earnings targets, even at lower projections.

"We believe the preponderance of news, including a possible ratings downgrade, will be negative for the company. It will be difficult for Lear to meet the financial targets set by Moody's to keep its Baa3 rating," Hutson said in a report Thursday. "It must refrain from further share repurchases, forgo talk of acquisitions, and stop raising its dividend."

Although the 2014 bonds are trading at a spread of 400 basis points over Treasuries versus 120 basis points over at issuance in July 2004, Hutson said he would not recommend buying the paper now in favor of a better entry point later this year. Lear's 2009 bonds, at a spread of 480 basis points, offer attractive yields, however, he said.

In addition to Moody's considering a downgrade for Lear, S&P also has Lear credit with a negative outlook on concerns about credit protection measures weakening in 2005 from a sharp fall in earnings and cash flow driven by harsh industry conditions. Lear only moved into investment grade territory last summer.

Lear derives 55% of its sales from Ford Motor Co. and General Motors Corp., whose North American production volumes were down 10% and 12%, respectively, over the past six months.

America West shares to sail

America West Holdings Corp. shares are poised to sail Friday on the merger inked with US Airways Inc., and the convertibles were marked up with a nice bounce in the stock Thursday, but traders said there may be some negative credit undertones from the union.

The America West 2.491% cash-to-zero convertible was pegged at 23.5 bid with the stock at $4.81 where it closed Thursday, which was a 38-cent gain, or 8.58%, on the day. In after-hours trading, the stock was seen up another 61 cents, or 12.68%.

Tempe, Ariz.-based America West and bankrupt US Airways announced a definitive agreement after the closing bell Thursday following a month of talks. In making the announcement, the two carriers say their combination will be better for the entire airline industry, which has struggled amid over-capacity and skyrocketing fuel prices.

The new airline will operate as US Airways but will be run by America West chief executive Doug Parker and is purported to be capable of earning a profit even with oil prices above $50 a barrel.

About $1.5 billion in private financing has been arranged for the deal, the companies said. Canadian-based ACE Aviation Holdings and PAR Investment Partners are among financiers, as well as Airbus with a $250 million loan.

Delta slips despite spin

At Delta Air Lines Inc.'s annual stockholder meeting Thursday, CEO Gerald Grinstein agreed that a union of America West and US Airways would be a good thing for the industry if it reduced capacity. He also spouted commitments to stay on track with massive cost cuts at Atlanta-based Delta, but the Delta converts lost ground.

Sellers still outnumbered buyers for Delta paper, a sellside trader said. Another sellsider put the 8% convertibles at 32 bid, 33 offered and the 2.875% issue at 31.5 bid, 32.5 offered. Delta shares ended Thursday off by a nickel, or 1.52%, at $3.25.

Grinstein expressed during the Delta meeting hopes that a merger of America West and US Airways would "relieve the glut of capacity hobbling the industry," the sellsider relayed. The trader added that Grinstein's comments matched similar remarks of AMR Corp. CEO Gerard Arpey at its shareholder meeting Wednesday.

"This [a reduction in capacity] is positive, but there are just still a lot of negative points for Delta to overcome," the trader said.

Grinstein said the airline is committed to doing whatever necessary to achieve the remaining $1 billion of its targeted $5 billion in cost cuts by the end of 2006, but he cautioned that the future is full of obstacles, especially the continuing affect of record fuel prices and pension under-funding.

Northwest dives on pressure

Bankruptcy chatter has haunted Delta for a year more or less, during which time it has accomplished several refinancing deals and wage concessions from union pilots. Other troubled legacy carriers like Northwest Airlines Corp. are embroiled in similar transactions - all trying to avoid the path of bankruptcy that claimed US Airways and UAL Corp., parent of United Airlines Inc.

"Northwest told their [union] pilots they would have to file [bankruptcy] by first quarter if something didn't give soon," said a sellside convertible trader.

The Northwest convertibles lost a half-point to full point, he said, whereas AMR Corp., parent to American Airlines Inc., and Continental Airlines Inc. gained on the speculation that America West and US Airways were close to announcing a merger.

Northwest convertibles were pegged at 70 bid, 71 offered at the close. The stock was down 6 cents on the day, or 1.08%, ending at $5.52.

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