Ford slips on cuts; Macrovision lights up debut; Scottish Re shrugs off rumors; Bristow plans deal

By Kenneth Lim

Boston, Aug. 18 - The convertible bond market ended the week on a whisper as the summer doldrums continued to put a drag on trading volume.

Ford Motor Co. was among the more active names, sliding after the auto maker announced production cuts that fueled concern about the company's market share.

The newly priced Macrovision Corp. 2.625% convertible due 2011 had a strong showing on its first day of trading, changing hands about 3 to 4 points above par for most of the day.

Scottish Re Group Ltd. saw muted gains on reports that European reinsurers may be considering bidding for the company, which has hired investment bankers to assess its options following a poor quarter.

Meanwhile, Bristow Group Inc. proposed a $200 million offering of three-year mandatory convertible preferred stock.

Observers blamed the slow Friday session on the summer.

"This time of year there's a strong tendency for the market to be quiet in the month of August," a sellside convertible bond analyst said. "Except for maybe the August of '02, that was very volatile, but most of the time summers are slow. It's the summer doldrums."

Ford reverses on production cuts

Ford's 6.5% convertible preferred eased about 1 point outright on Friday in line with the stock after the auto maker revealed plans to slash production at its North American plants.

The preferred dropped by 2.67% or 0.90 point to close at 32.80 as Ford stock (NYSE: F) closed at $8, a loss of 2.08% or 17 cents.

Dearborn, Mich.-based Ford said Friday that it will cut fourth-quarter production in North America by about 21%, or 168,000 vehicles, reducing its output to the lowest for a fourth quarter since 1981. The move will shut 10 North American plants for a significant portion of the rest of the year, but employees at those plants will continue to receive salaries during the shutdowns.

"They might be cutting salaried employees, which should be positive, but they also cut production pretty dramatically, which is an indication that they might be losing market share," a buyside convertible bond trader said. "If they just cut jobs, there's nothing big, the stock might even go up. But they're cutting production, and part of the cuts are in their truck...the F-150, which is their bread and butter."

The trader, whose firm no longer holds a hedged position in the convertible, said part of the selldown on Friday may have been profit-taking after the recent rally in Ford's stock.

"The stock was up a dollar, $1.50 over the past week, so people may have been just looking for an opportunity," the trader said.

Fitch Ratings on Friday cut its issuer default rating on Ford deeper into junk, to B from B+, with a negative outlook. Fitch said the production cuts indicated expectations of continued weak sales of pickups and sport utility vehicles, and would hurt the company's cashflow.

"Sustained market share losses or a decline in economic conditions through 2007 would result in continued high levels of cash outflows and erosion of liquidity," Fitch said.

Standard & Poor's also placed Ford on CreditWatch with negative implications.

"These cuts, along with the very likely significant cost reductions to be announced in September, reveal the magnitude of turnaround efforts needed to deal with Ford's deteriorating product mix, lower market share, and excess production capacity in North America," the ratings agency said.

Macrovision shines on debut

Macrovision's newly priced 2.625% convertible due 2011 took off in its secondary market debut on the back of a strong common stock price and positive responses to the deal's Thursday pricing.

The convertible was 103 bid, 104 offered early Friday against the previous closing stock price of $21.59. A bid at 107.125 was seen later in the day with the stock at $23. Macrovision stock (Nasdaq: MVSN) rose 6.99% or $1.51 and finished at $23.10.

"It did damn well," a sellside convertible bond trader said.

Macrovision's upsized $240 million of five-year convertible senior notes priced Thursday within new price talk, at a coupon of 2.625% and an initial conversion premium of 31%.

The notes, which were offered at par, were talked at a coupon of 2.625% and an initial conversion premium of 30% to 32.5%. Original price talk was for a coupon between 2.625% and 3.125% and an initial conversion premium between 25% and 30%.

The size of the deal was initially $175 million with an over-allotment option for a further $25 million. There is no more greenshoe.

JP Morgan was the bookrunner for the Rule 144A offering.

Macrovision is a Santa Clara, Calif.-based developer of anti-piracy solutions for software and other digital content. It will use the proceeds of the deal for general corporate purposes and to concurrently buy back up to $50 million of its own stock for convertible note hedge and warrant transactions.

A sellsider said the deal looked attractive because the pricing terms were "very reasonable." The company has a good credit profile with positive cashflow and the short, five-year structure of the notes made it easier to invest in.

A buysider said the offering was "very well received" and quipped that part of the reason may have been that Macrovision was not a real estate investment trust - a refreshing change after four of the seven new deals in the past two weeks, including Macrovision's, were from REITs.

"If the future of converts were all REIT converts, a lot of us would go out of business," the buysider said.

REIT deals galore

A sellside convertible bond analyst said the recent spate of new issues from REITs is partly issuers taking advantage of the fact that many of their stocks have gone up.

REIT convertibles are usually uninteresting for most convertible investors because of the low volatility and high dividend yields on the common stock, but the new deals may have been a welcome addition for convertible funds, the analyst said.

"For pure convert funds, if you're managing a fund that by its charter has to invest only in convertibles, the issuance of these bonds gives you an opportunity to participate in the industry," the analyst said.

REIT convertibles are also relatively more attractive these days.

"Almost all converts that are issued these days have dividend protection, so you don't really lose out by being in the convert," the analyst said. "And there is ultimately a fundamental difference between the stock and the bond [in the downside protection]."

Scottish Re muted on takeout rumors

Scottish Re's 4.5% convertible due 2022 and putable in December 2006 was just slightly higher outright on Friday after the stock soared on reports that European reinsurers were interested in buying the company.

The convertible traded at 96.75 against a stock price of $7.50 late Friday, about a quarter-point above levels a day earlier. Scottish Re stock (NYSE: SCT) leapt 12.44%, or 83 cents, to close at $7.50.

Media reports on Friday quoted analysts who speculated that European reinsurers Munich Re, Hannover Re and Swiss Re could be interested in buying Scottish Re, which hired investment bankers from Goldman Sachs and Bear Stearns earlier in the month to consider strategic options following a loss-making quarter.

Asked about whether it had received any offers or if it was in talks with any buyers, a Scottish Re representative said the company's board was "evaluating all alternatives at this point."

A buyside convertible bond trader noted that the bond has stabilized around its current level ahead of its put in December, despite falling earlier in the month following Scottish Re's loss. Although news of a takeover by an established company may be more reassuring for convertible holders, news of potential buyers was not a big surprise, the trader said.

"I don't think it'd be a big surprise," the trader said. "Because when they hired Goldman Sachs, one of the things they [investors] always think is, it's to find a buyer for them. But it'll be a positive development."

Standard & Poor's on Friday cut Scottish Re's counterparty credit rating by three notches, to B+ from BB+, citing concerns about the Bermuda-based reinsurer's ability to tap credit facilities.

"Liquidity sources have decreased such that the holding company's liquidity situation has been impaired," the ratings agency said. "It is our belief that without additional capital, the company is likely to be unable to satisfy future needs, including potential debt redemption in December 2006."

Scottish Re has said in previous statements and investor conference calls that it is "confident" of meeting its obligations if the convertibles are put in December this year.

Bristow plans new deal

Bristow Group plans to sell up to $200 million of three-year mandatory convertible preferred stock, the company said Friday.

The company did not provide details on the price talk and the timing of the deal.

The deal, which comprises 4 million preferred shares, will be offered at $50 apiece. There is a greenshoe for a further $30 million, or 600,000 preferred shares.

Credit Suisse is the bookrunner of the registered off-the-shelf deal.

Bristow, a Houston-based provider of helicopter sevices to the offshore oil and gas industry, plans to use the proceeds of the deal to fund aircraft purchases. Upon the completion of the offering, Bristow will exercise options it currently has acquire additional large aircraft.

Bristow stock (NYSE: BRS) closed at $38.42 on Friday, down by 0.23% or 9 cents, before the deal was announced.

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