GM drops on Obama's plan; financials mostly weaker; Teradyne, Ingersoll-Rand deals emerge

By Rebecca Melvin

New York, March 30 - General Motors Corp. convertibles opened sharply lower after the Obama administration said the carmaker's current restructuring plan is inadequate, and it gave GM 60 days to present a plan with deeper cost cuts.

The government also said it will provide GM with loans to keep it afloat during that time.

Ford Motor Co. was also weaker in sympathy with the news; but the Dearborn, Mich.-based carmaker's bonds weren't actively traded, and haven't been of late since its tender offer was announced, market sources said.

Other than autos, the only other sector in focus was financials, sources said.

Among financials, Fifth Third Bancorp was a bit stronger on news that it is selling a majority interest in its payment-processing unit. But Wells Fargo & Co. was weaker, as was Bank of America Corp.

Convertibles traders complained that Monday's session was slow with thin volume.

The tough talk on GM and Chrysler LLC seemed to rattle investors, and U.S. stocks slid. The Dow Jones Industrial Average fell 254.16 points, or 3.27%, to 7522.02, the S&P 500 index fell 28.41, or 3.48%, to 787.53, and the Nasdaq Composite fell 43.4, or 2.81%, to 1501.8.

Meanwhile, two new convertibles deal emerged after the close. North Reading, Mass-based Teradyne Inc. said it plans to price $150 million of convertible senior notes, and Ingersoll-Rand Co. Ltd. plans to price $300 million of three-year exchangeable senior notes. Both deals were expected to price after the close of markets Tuesday.

GM drops, but not as steep as shares

General Motors' 6.25% convertible due 2033, or the GPM paper, closed at 2.90, which was down 20% versus a stock price of $2.70. GM common stock shed 92 cents, or 25%, to $2.70.

The GM 5.25% convertible due 2032, or the GBM paper, closed down 70 cents, or 20%, to $2.80.

One sellsider suggested that the government's tough talk and show of strength in dealing with the automakers was directed against bondholders and implies that bondholders would have to make more sacrifices.

In addition to giving GM only another 60 days to get a plan together before advocating Chapter 11 bankruptcy, the government also insisted that GM chief executive Rick Wagoner step down.

Wagoner will be replaced by Frederick Henderson, the current chief operating officer. It also has given Chrysler only 30 days to form a partnership with Fiat or else it will receive no more government aid, forcing a bankruptcy.

Gimme Credit analyst Shelly Lombard said in a note Monday, "The Obama administration has obviously decided to play hardball with General Motors and Chrysler."

But the three key variables that no one can peg are how low vehicle sales will fall during the recession, how long it will take for sales to rebound, and to what level they will rebound, the analyst wrote.

"So we assume the Obama administration wants to see a plan based on more conservative assumptions and maybe more concessions from bondholders and the UAW," Lombard said.

"The bondholders have been reluctant to convert two-thirds of their bond holdings into equity in a restructured GM because that equity is extremely difficult to value and because it would put them in a junior position in a bankruptcy that they view as inevitable unless GM makes more dramatic cuts. We reiterate our sell rating on GM bonds," the analyst said.

The UAW labor agreements of last fall should have enabled GM to close the gap between its EBITDA and what it needs to support its capital structure. But due to the recession and credit crunch, that won't happen until 2010 and, in the interim, GM's liquidity is proving to be inadequate to cover the operating losses it incurs.

"GM's negative cash flow is being exacerbated by a recession that is proving to be longer and deeper than anyone predicted. Without government intervention, a bankruptcy filing is highly likely," the Gimme Credit research said.

The independent research firm went on to say that for GM bondholders, "this could be a case of "be careful what you wish for."

The bondholders haven't wanted to convert two-thirds of their debt into equity because they didn't believe GM had a viable plan that would ensure that the equity they receive will be worth something eventually. And if GM still ended up filing bankruptcy after the bondholders had converted their bonds into equity, as holders of equity instead of debt, they would be last in line for any recovery and would have little if any negotiating leverage. The bondholders committee is also reportedly in favor of a pre-packaged bankruptcy.

The last offer from GM reportedly called for bondholders to exchange three-fourths of their debt for 90% of GM's equity, new cash, and unsecured notes. Now bondholders are likely to end up with even more equity and less debt and a government guarantee on that new debt may not be forthcoming.

The Ford 4.25% convertible bonds due 2037 traded a little weaker, around plus 6 points over parity.

Fifth Third

Fifth Third Bancorp's 8.5% convertible preferred stock traded at 36.2, which was better than the 33 to 35 level seen in the middle of last week.

Fifth Third common stock gained 5.5%, or 13 cents, to $2.38.

The Cincinnati-based bank holding company said Monday that it plans to sell a majority interest in its payment-processing unit to private equity firm Advent International Corp. for $561 million in a bid to strengthen its capital base.

The unit will be spun off into a joint venture valued at about $2.35 billion, Fifth Third said in a statement.

Bank of America's convertible preferred shares traded at 386, and Wells Fargo's convertible preferreds traded at 445, according to a New York-based sellside trader.

Ingersoll-Rand to price

A subsidiary of Ingersoll-Rand Co. plans to price $300 million of three-year exchangeable senior notes talked to yield 4.75% to 5.25% with an initial conversion premium of 17.5% to 22.5%.

Concurrent with the offering Ingersoll-Rand will offer a benchmark-sized amount of senior notes.

The registered convertibles offering, being sold via bookrunners Credit Suisse, Goldman Sachs & Co. and J.P. Morgan Securities Inc., was expected to price after the close of markets Tuesday.

The bonds will be exchangeable into cash and shares of the company's class A common shares. They will be non-callable for life. And they will have contingent conversion at a hurdle of 130% and net share settlement.

Proceeds from the notes offerings along with the expansion of the receivables financing facility will be used to repay the bridge loan that matures in June 2009 and provide additional liquidity for the company.

The offerings are intended to strengthen financial flexibility and enhance its credit profile, the company said in a release.

Ingersoll-Rand is a global diversified industrial firm incorporated in Bermuda.

Teradyne to price

Teradyne plans to price $150 million of convertible three-year senior notes after the market close Tuesday. The deal was talked to yield 5.75% to 6.25% with an initial conversion premium of 20% to 25%.

Goldman Sachs and Merrill Lynch & Co. are joint bookrunners of the registered offering.

Proceeds are expected to be used to repay outstanding borrowings under a current credit facility and to enter into call options overlay. Any remaining proceeds will be used for other general corporate purposes.

Teradyne, based in North Reading, Mass., supplies automatic test equipment used in consumer electronics, automotive, computing, telecommunications and aerospace and defense industries.

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