General Motors' gains boost auto sector; Flextronics up on rival's earnings; Quanta plans $125 million deal

By Kenneth Lim

Boston, April 26 - The convertible bond market had a languid session on Tuesday, but was generally up on strong earnings data in the tech sector and improved sentiment in the automotive names.

"It's really, really slow in converts today," said a sell-side convertible trader.

General Motors Corp. got a boost from Merrill Lynch & Co., which recommended the company's 4.5% convertible putable in 2007 and upgraded the stock to neutral from sell. That confidence in the Detroit auto maker helped industry names, with Lear Corp. and American Axle and Manufacturing Holdings Inc. improving on an outright basis in line with their stocks.

In the tech sector, contract manufacturer Flextronics International Ltd. benefited from industry peer Sanmina-SCI Corp.'s strong earnings as investors saw signs of a good quarter for the sector.

From the primary market, Quanta Services Inc. launched an overnight $125 million of 20-year 3.75% convertible subordinated notes with an initial conversion premium of 35% talked to be reoffered at 98.25% of par.

Gilead Sciences Inc.'s newest convertibles were active on Tuesday and improved against a 6.69% drop in the stock. The 0.5% convertible due 2011 was seen at 93.25 against a stock price of $57, while its 0.625% convertible due 2013 was seen at 92.5 against the same stock price.

The convertibles, which were panned at their launch as too rich for a stock with low volatility, were worth a second look when the stock fell even though it was not clear why the shares declined, said a buy-side convertible trader.

"People are seeing the stock move, and people are saying that at the implied vol, these things are still coming in relatively cheap. "It's done pretty poorly since the deal...but now people are realizing some vol, saying maybe this is a 30% vol stock, not a 25% vol."

Shares of Gilead Sciences (Nasdaq: GILD), a Foster City, Calif.-based biotech company, closed at $57.31 on Wednesday, down 6.69% or $4.11.

Novell Inc.'s 0.5% convertible due 2024 was also higher on an outright basis on Wednesday on renewed speculation that the software developer could be a takeover target. The convertible was seen at 93.25 against a stock price of $8.13. Novell stock (Nasdaq: NOVL) closed up 3.44% or 27 cents.

"There are rumors that they're a take-out candidate," the buy-side trader said.

A California-based buy-side convertible analyst said there has been speculation about Waltham, Mass.-based Novell being a takeover target, but nothing concrete has emerged. And not every takeover is necessarily good, the analyst said.

"Whoever is taking them over will have to take over all their legacy issues," the analyst said.

Both DST Systems Inc.'s convertibles also gained on an outright basis as the stock shot up 12.02% on the back of a better first quarter and new customers. The DST 3.625% convertible due 2008 was marked at 131.26 bid, 131.76 offered versus the closing stock price of $61.96 on Tuesday, while the 4.125% convertible due 2010 was 136.8 bid, 137.3 offered at the same stock level. DST stock (NYSE: DST) finished higher by $6.65.

"Both bonds are up big after the results," said a sell-side trader. "DST was pretty active."

DST said Tuesday that it had net income of $81.7 million, or $1.11 per share, in its first quarter, up from $49.2 million or 61 cents per share in the year-ago period. Kansas City, Mo.-based DST, which processes account data for mutual funds, also said it had secured its first new mutual fund client in more than a year.

General Motors gains on upgrades

General Motors' three convertible series improved on Wednesday after the automotive heavyweight's stock was upgraded by Merrill Lynch analysts, who also recommended the company's 4.25% convertible due 2032.

The General Motors 4.25% convertible (NYSE: GXM) closed at 23.75, up 0.2 point or 0.85% against the closing $23.15 stock price. The 5.25% convertible 2032 (NYSE: GBM) ended at 16.56, up 0.36 point or 2.22%, while the 6.25% convertible due 2033 (NYSE: GPM) added 0.64 point or 3.63% to close at 18.25. General Motors stock (NYSE: GM) closed higher by 8.13% or $1.74.

Merrill Lynch convertible analyst Marc Malloy recommended in a report on Wednesday the 4.25% convertible "for investors desirous of yield," citing a yield to put of 12.5% with the put approaching in just over 10 months.

The main risk to the convertible is that General Motors becomes bankrupt before the put date, Malloy said. But Malloy's equity counterpart John Murphy said in a separate report that General Motors can manage that risk. Murphy upgraded General Motors to neutral from sell in his report.

For the other two convertible series from General Motors, Malloy wrote that both are equity sensitive and so receive a neutral recommendation in line with Murphy's rating.

"We view General Motors' 6.25% and 5.25% as suited to investors who wish to have General Motor's equity exposure and credit exposure while desirous of current yield," Malloy wrote. "Investors essentially give up some upside participation in the equity to receive a higher current yield. Since the convertibles are direct obligations of GM, the company is not permitted to defer the semi-annual payments. Theses 2 securities offer investors equity and credit exposure, high current yield and solid call protection."

Not everyone was sold on General Motors.

A buy-side convertible fund manager said: "We aren't really that involved in GM, but we have a big underweight because I'm not that convinced on it."

Nevertheless, General Motors' strong showing on Wednesday gave the rest of the auto sector a boost. Lear Corp., which said Wednesday that first-quarter net income rose almost 15% to $17.9 million and it was on track to meet its full-year guidance, saw its convertible gain a point outright as its stock shot up 13.99%. The Southfield, Mich.-based auto interior supplier's 0% convertible due 2022 was marked at 46.56 bid, 46.81 offered versus the closing stock price of $25.10 on Wednesday. Lear stock (NYSE: LEA) closed higher by $3.08.

American Axle and Manufacturing's 2% convertible due 2024 also improved slightly on an outright basis in line with the stock, which rose 6.93% or $1.20 to close at $18.51. The convertible was marked at 78.63 bid, 79.l3 offered against the closing stock price on Wednesday.

American Axle (NYSE: AXL) is a Detroit-based automotive engine maker.

Flextronics gets Sanmina boost

Flextronics' 1% convertible due 2010 gained about 1.5 points outright in line with a rise in the stock after industry peer Sanmina-SCI narrowed losses and improved guidance.

The Flextronics convertible was marked at 94.75 bid, 95.25 offered versus the closing stock price of $11.38. Flextronics stock (Nasdaq: FLEX) ended higher by 3.55% or 39 cents.

"The reason Flextronics is up is that Sanmina reported very nice numbers, and Flextronics is in a similar business," said a buy-side convertible analyst. "And FLEX is reporting tomorrow, so that's why there's interest."

Sanmina-SCI said Tuesday that it had a second-quarter net loss of $103.4 million, from a loss of $1 billion in the year-ago period. San Jose, Calif.-based Sanmina also estimated that it would earn between 8 cents and 10 cents per share in the third quarter on sales of $2.7 billion to $2.8 billion. Sanmina is an electronics contract manufacturer, and is a competitor of Singapore-based Flextronics.

Quanta launches $125 million deal

Quanta Services on Wednesday announced $125 million of 20-year 3.75% convertible subordinated notes with an initial conversion premium of 35%, talked to be reoffered at 98.25.

There is also a greenshoe option for a further $18.75 million.

The offer price will be finalized on Thursday before the market opens, syndicate sources confirmed. Quanta Services stock (NYSE: PWR) closed at $16.60, down 12 cents or 0.72%, on Wednesday before the deal was announced.

Credit Suisse, Bank of America and JP Morgan are the bookrunners of the Rule 144A deal.

Houston-based Quanta Services will use the deal proceeds, together with existing cash, to tender for its $172.5 million of 4% convertible subordinated notes due 2007. Quanta Services provides specialty network contracting services to the electric power, gas, telecommunications and cable television industries.

Quanta Services' 4% convertibles were marked at 96.75 bid, 97.75 offered against the closing stock price of $16.60 on Wednesday.

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