Ford buying drives convertible up; GM 4.5s see buying, too; Delta, airlines quiet, mixed on earnings

By Ronda Fears

Nashville, April 20 - Ford Motor Co. posted weaker first-quarter results Wednesday but it was no surprise and actually better than expected, and the news pushed its convertible higher on heavy buying. General Motors Corp.'s 4.5% convertible also saw buying, but its 6.25% and 5.25% converts continued to slip.

Elsewhere in the transportation sector, airline paper was mixed as AMR Corp., parent of American Airlines Inc., showed a narrower loss while Continental Airlines Corp.'s net loss was wider for first quarter. Meanwhile, the market awaits Delta Air Lines Inc.'s earnings report on Thursday.

Market sources mentioned Calpine Corp., Massey Energy Co. and Halliburton Co. as sellers in energy paper were hitting some low bids trickling in. Calpine's convertibles were described as a half-point to 1 point lower ahead of earnings due May 5.

Freeport McMoran Copper & Gold Inc. and Inco Ltd. also were lower.

Affiliated Managers Group Inc.'s floater dropped around 2 points on a big exit in the name, a sellside trader said. The investment management firm is due to report earnings next Wednesday, and the stock lost 78 cents, or 1.31%, to close Wednesday's session at $58.69.

Charter Communications Inc. was another recurring convertible name mentioned trading lower, with the newer 5.875% issue at 73 and the common stock at $1.33. Charter shares ended Wednesday off 4 cents, or 2.99%, at $1.30. The St. Louis cable company is scheduled to report earnings May 3.

Trading, outflows pick up

Flow in the convertible market improved Wednesday, but many traders referred to the bids emerging as "bids in the hole," or low-ball bids, and they are still talking about heavy liquidations.

"I think it's worse than I thought," said a convertible hedge fund manager in New York. "There will be more to come, too. We've been talking about this for two years now - a day of reckoning that was inevitable when so much money was getting poured into the strategy and things were getting bought that shouldn't have."

A sellside trader said he has lost six customers in the past week or so, and he estimated that around half of the trading he's done this week was related to funds closing down and clearing their books. A sellside desk analyst noted, "Here on the sell side, we see more of what's going on. These days, the more you see, the more unhappy you get."

Losses among convertible arbitrageurs have been a focal point, with declines in the 5% neighborhood year to date, but outright convertible funds also are feeling the pain with losses estimated at some sellside shops at around 6.5%. Convert arbs get more attention, onlookers note, because they make up about two-thirds of the market.

The pain is global, too.

Investorsoffshore.com reported Wednesday that the latest hedge fund strategy barometer survey released by TARA Capital, the Switzerland-based investment advisory firm, showed that "not one respondent indicated they were willing to increase their allocations to convertible arbitrage while 89% of respondents are planning to decrease their investments in the strategy. This represents the biggest negative score ever recorded by any strategy since the launch of the [survey] one and a half years ago."

BearingPoint taps PIPE market

BearingPoint Inc. late Wednesday launched a private placement $250 million convertible bond in the Regulation D market, and sources in the convertible market said Morgan Stanley would be lead placement agent for the deal but no other information was available on the series C convertible issue.

McLean, Va.-based BearingPoint, formerly KPMG Consulting Inc., said proceeds would be used to collateralize and/or replace letters of credit under its existing credit facility, which may involve terminating the credit facility, to support letters of credit or surety bonds otherwise in respect to its state and local business and for general corporate purposes.

On Dec. 17, BearingPoint sold $400 million of 20-year Rule 144A convertible bonds in two parts at par via joint bookrunners Banc of America Securities and JPMorgan Securities. The series A bonds, non-callable for seven years, will yield 2.5% with a 35.5% initial conversion premium. The series B bonds, non-callable for 10 years, will yield 2.75% with a 35.5% initial conversion premium.

At the same time of the Rule 144A convertible offering, BearingPoint said it replaced its then-current credit facility with a new $400 million senior revolving credit facility. Proceeds from both transactions are earmarked to repay its $220 million of senior notes and its $135 million previous revolver.

BearingPoint shares Wednesday closed off a dime, or 1.27%, at $7.77.

Ford 6.5s surge 1.5 points

While Ford's outlook for 2005 remains tough, headway already made by Ford and some of its plans to combat ongoing economic strains tempted buyers into the convertible in a big way.

Ford's 6.5% convertible preferred shot up 1.5 points to 39 on heavy volume while the stock added just 6 cents on the day, or 0.65%, to close at $9.34.

Ford said it earned $1.2 billion in the first quarter, or 60 cents a share. That was lower than net income of $1.95 billion, or 94 cents a share, in first quarter 2004, but ahead of Wall Street expectations and a nice contrast to GM's big net loss for the quarter. Ford's revenue in the quarter rose to $45.1 billion from $44.7 billion a year ago.

Tougher times are anticipated by Ford, though, and the company estimated that second-quarter earnings before special items would range from break-even to a loss of 15 cents a share. But Ford executives said they expect results should turn around in fourth quarter.

Ford eyes debt buybacks

To counter some of the pressures against the bottom line, Ford executives on the earnings conference call said the company will consider buying back debt opportunistically, a trader pointed out. And that made the Ford paper particularly appealing because of recent weakness.

"When spreads are totally unrealistic, we may be a little opportunistic from time to time," Ann Marie Petach, Ford's treasurer, was quoted as saying on the call.

Also, Ford said it is considering the sale of its Hertz Corp. rental car unit.

Continental off

High fuel prices and weak pricing power were perhaps the biggest complaint from Continental Airlines on Wednesday as it reported a wider loss for first quarter. In particular, Continental said fare hikes were not enough to counterbalance the sharp rise in costs.

It was no big surprise and there was no news from the company, really, traders said, so the convertibles of the airline carrier were little changed and there was not a great deal of traffic in the paper. Continental's convertibles were all pegged about a quarter-point off while the stock dipped 9 cents, or 0.74%, to close at $12.06.

Continental posted a first-quarter net loss if $184 million, or $2.77 a share, compared with a net loss of $124 million, or $1.90 a share, in first quarter 2004, and an operating loss of $171 million versus $135 million a year ago. Yet, revenue topped $2.5 billion, an 8.6% increase year over year.

Fuel prices were 39.5% higher than a year ago, Continental reported.

AMR marked up

AMR echoed complaints of skyrocketing fuel prices cutting into bottom-line results but posted a narrower loss for first quarter than a year ago and handily beat analysts' expectations.

The AMR convertibles were described as about 1 point higher but also with little traffic. AMR shares gained 35 cents on the day, or 3.44%, to $10.51.

The American Airlines parent posted a first-quarter net loss of $162 million, or $1.00 a share, versus a net loss of $166 million, or $1.03 a share, in first quarter 2004. Excluding a $69 million benefit from excise-tax refunds, the airline said it would have lost $230 million, or $1.43 a share. Revenue rose to $4.75 billion from $4.51 billion.

Fuel costs for AMR rose similarly to Continental, up 36% to $1.1 billion in first quarter and AMR said it expects its fuel costs to rise to $1.4 billion in second quarter.

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