GM adds ahead of exchange end; BofA, CommScope extend gains; Allegheny, Alliance launch deals

By Rebecca Melvin

New York, May 26 - General Motors Corp.'s 6.25% convertible bonds - the largest of GM's four convertible issues with about $4.3 billion outstanding - jumped Tuesday in heavy volume as the ailing automaker continued to attempt to negotiate out-of-bankruptcy settlements with stakeholders.

A standing exchange offer with bond holders was set to expire at 11:59 p.m. ET Tuesday.

Bank of America Corp.'s convertible preferreds were modestly stronger Tuesday, extending gains notched Friday, even though the bank's common shares slipped.

The bank was upgraded to "market perform" from "underperform" by FBR, which noted that the first half of its capital raising plan has been successfully completed, reducing the risk of near-term dilution.

Other trading was dominated by recent new issuance, with the most recently priced deal, CommScope Inc., extending gains to trade at 106, up from 104 on Friday, when it priced an upsized $250 million of convertibles.

"The market is still digesting the supply," a New York-based sellside analyst said.

The primary market saw two more new deals emerge after the close. They were Allegheny Technologies Inc.'s planned $350 million of five-year convertibles, set to price after the close Wednesday, and Alliance Data Systems Corp.'s planned $300 million convertible deal, also set to price after the market close on Wednesday.

GM mostly gains ahead of exchange deadline

As the clock was ticking on GM's exchange offer to bond holders, which was set to expire at 11:59 p.m. ET Tuesday, it was reported that GM struck a new deal with its United Auto Workers union, which will give the UAW 17.5% of its common stock, $6.5 billion of preferred shares and a $2.5 billion note to fund a trust that will take over retiree health care costs in exchange for about $20 billion in loans.

Under the old plan, a UAW trust fund for healthcare would receive a GM stake of about 39%. In addition, the U.S. Treasury would hold a 50% stake and bond holders would be given 10% in exchange for about $27 billion in debt.

The bond holders exchange offer wasn't known to have been modified, but there was some speculation that holders would get a better deal. But previously GM has said that the government did not want the bond holders to get more than 10%.

By tendering their 1.5% series D convertibles due June 1, 2009, holders of those convertibles will agree to extend the maturity of their convertibles, waive all rights and remedies and forbear from enforcing those rights if the exchange offers are extended beyond June 1. The maturity would be extended to the earlier of the termination of the exchange offers and the consummation of the exchange offers.

GM said a successful exchange would reduce its liabilities to bond holders, the U.S. Treasury and its voluntary employee benefit association by at least $44 billion.

The 1.5% series D convertibles due June 1, 2009, with $25 par, of which there is about $1 billion outstanding, gained seven cents, or 2%, to $3.30, on Tuesday.

But the $4.3 billion of 6.25% series C convertibles 2033 surged 24 cents, or 15%, to $1.80 in heavy volume.

The second largest issue, the 5.25% series B convertibles due 2032, of which there is $2.6 billion outstanding, gained five cents, or 3%, to $1.64.

Meanwhile the smallest issue, the $39.41 million of 4.5% series A convertibles, ended lower, down 2 cents, or 1%, at $1.78.

In total, there is a little bit more than $8 billion of convertible GM debt.

The Detroit-based automaker needs 90% of the GM debt holders, or about $24 billion, to agree to the exchange if it is to avert bankruptcy - something that is not seen as likely to happen.

Holders have said that the offer gives them too small of a stake for the amount they are owed.

BofA sports modest gain

Bank of America's 7.25% perpetual convertible preferreds gained to about 728 versus a share price of $20.70 on Monday. Last Wednesday the BofA preferreds had sold off to 669.

Shares of the Charlotte, N.C.-based super regional bank slipped by 9 cents, or less than a percentage point, to $10.98 in Tuesday's session.

FBR Capital Markets upgraded the bank to "market perform" given that the first half of its $34 billion capital plan has been successfully completed and its shares trade below the investment bank's $12 price target.

"We see less risk of near-term dilution given the new capital and apparent strong demand for BAC's new shares," the FBR analysts Paul Miller, Bob Ramsey and Jessica Halenda wrote in a research note.

"We remain very cautious on the company longer term, given rapidly rising credit losses, which totaled $6.9 billion in 1Q09 ($9.1 billion on a managed basis). If losses continue to grow at a 25% sequential pace, they could exceed the company's 'core' pre-provision, pretax earnings power within a few quarters," the FBR analysts wrote.

"Further, we expect that asset sales, dilution, higher regulation (including FDIC insurance assessments and new credit card regulations) will all reduce BAC's 'normalized' earnings power. We reiterate our $12 price target, equal to 1.1x 1Q09 tangible book value. The recent capital raise and CCB sale are neutral to tangible book, but further asset sales and/or earnings above PPNR may be slightly accretive," according to the note.

Risk remains because BofA must sell enough assets to generate another $6 billion in gains and must earn at least $7 billion above the government's pre-provision net revenue (PPNR) estimate.

Realizing $6 billion in asset sale gains will be challenging, given that Columbia is likely worth $1.5 billion to $2.5 billion and First Republic was marked to fair value when Bank of America acquired Merrill Lynch on Jan 1. Bank of America has also mentioned the possibility of joint ventures, the note outlined.

Allegheny, Alliance deals emerge

Price talk on Alliance's $300 million of five-year senior unsecured convertible bonds was a coupon of 3.75% to 4.25% and an initial conversion premium of 20% to 25%.

The Rule 144A deal has a greenshoe of $45 million of additional convertible notes.

Barclays Capital, JP Morgan and Bank of America-Merrill Lynch are involved in placing the deal.

Proceeds and related warrant transactions are expected to be used to repurchase about $75 million worth of Alliance Data common stock, to pay about $39.3 million for the cost of convertible note hedge transactions related to the offering, and for general corporate purposes, which may include repayment of outstanding indebtedness under the company's revolving credit facility.

Alliance is a Dallas-based marketing services company.

Alliance has an existing issue of 1.75% five-year convertibles that were priced last summer. Those notes were also sold in connection with convertible note hedge transactions and separate warrant transactions.

Allegheny planned to price $350 million of five-year convertibles to yield 4% to 4.5%, with an initial conversion premium of 27.5% to 32.5%.

The convertibles would be priced concurrently with $300 million of 10-year senior straight notes, both via shelf registrations.

JPMorgan and Citi are the joint bookrunners for the convertible note offering.

Pittsburgh-based Allegheny is a diversified specialty metals producer.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Alliance Data Systems Corp. NYSE: ADS

Bank of America Corp. NYSE: BAC

CommScope Inc. NYSE: CTV

General Motors Corp. NYSE: GM

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