U.S. Bancorp sees lackluster debut; Ford lower on new cuts; General Motors retreats on sector woes

By Kenneth Lim

Boston, Sept. 15 - The convertible bond market slowed down on Friday after a busy week, with the latest new deal by U.S. Bancorp seen as fairly priced but unlikely to trade much.

Ford Motor Co. was lower outright but slightly better on a dollar-neutral basis after the stock fell on the back of new turnaround measures and the company's suspension of its common stock dividend.

General Motors Corp. also slipped with the stock on broad-based concern about auto makers, following Ford's announcements and reduced guidance at DaimlerChrysler.

The market in general was quiet, as investors wrapped up an otherwise active week when seven new issues were added to the market.

"It's really slow," a sellsider said. "Fridays tend to be quiet."

U.S. Bancorp flat on debut

U.S. Bancorp's new floating-rate convertible debenture due 2036 had a lackluster debut on Friday after the deal was reoffered at 98.9 before the market opened.

"People are probably going to hold it if they buy it," a sellside convertible bond trader said.

The $2.5 billion deal was reoffered at 98.9 apiece in overnight pricing, with a coupon set at Libor minus 175 basis points and an initial conversion premium of 16%, market sources said.

The reoffered range was 98.9 to 99.1 during talk.

The deal has an over-allotment option for a further $375 million. U.S. Bancorp stock (NYSE: USB) closed at $33.26 on Friday, a gain of 0.79% or 26 cents.

Citigroup was the bookrunner for the Rule 144A offering

The convertibles are non-callable for the first year, and may be put in years one, two, five, 10, 15, 20 and 25.

U.S. Bancorp, a Minneapolis-based bank, said part of the proceeds of the deal will be used to fund a concurrent repurchase of up to 10.2 million shares. The remainder of the proceeds will be used for general corporate purposes, including possible additional share buybacks.

The convertible trader said the new convertible was a safe piece of paper with a "razor thin credit spread," and was likely to "trade decently," but noted that there was little in the deal for investors other than the short put.

"It's a small discount," the trader said. "You got a yield to your first put, a small premium, that's it."

Managers of convertible funds may find in the deal an easy way to maintain the credit weighting of their portfolio, the trader said.

"They're extremely safe to own," the trader said. "You keep your portfolio weighted better in terms of risk so you can go out and buy those speculative names."

A convertible bond analyst agreed that the investors most likely to be attracted to the deal were those who were seeking a low-risk investment for their portfolio.

"It's those who need a relatively safe instrument to complement or add to their financial weighting," the analyst said.

Hedge funds are unlikely to be interested in the deal, the analyst said. U.S. Bancorp's previous floating-rate debenture deals were offered with similar structures, but a few years ago "the hedge funds could still asset swap it," the analyst said.

"The asset swap trade doesn't really make sense today...There's no P and L in it for the hedge guys," the analyst said. "I would just buy it, hold it and put it back. Don't expect the stock to go up, and there's no downside because it's putable in one year."

A hedge fund convertible bond trader agreed.

"We passed on that, because it's awful [for hedge funds]," the trader said. "It is low risk, but it doesn't make sense for hedge funds, really. You're basically loaning them the money, right?"

The sellside analyst explained that the deal worked the best for U.S. Bancorp, which gets to borrow money at a low rate.

"You're issuing it now at Libor minus 175 bps, so they're saving right there 175 bps," the analyst said.

Ford slips on cuts

Ford's 6.5% convertible preferred was lower outright but slightly better on a dollar-neutral basis after the company announced new turnaround plans that included expected cuts in jobs, production, market share and the common dividend.

The preferred was seen at 33.75 bid, 34.125 offered against a stock price of $7.95 on Friday. Ford stock (NYSE: F) shed 11.77% or $1.07 to close at $8.02.

"They're [the company] moving in the right direction, but there's still some concern that they didn't go far enough," a convertible bond trader said.

Ford on Thursday outlined plans to accelerate its cost-cutting measures, saying that it will reduce its salaried workforce by about a third and offer buyouts to all its union workers. The Dearborn, Mich.-based auto maker also plans to stop production at two more North American plants in 2007, after having announced production cuts at seven plants earlier this year.

Ford also said it now expects its long-term market share in the United States to be between 14% and 15%, down from the current share of just over 16%. The company also suspended its fourth-quarter dividend.

A sellside convertible bond analyst said that with the suspended dividend, the convertible preferreds have started to look a tad more attractive.

"The risk-reward actually looks pretty interesting now," the analyst said. "They cut the dividend to zero, so now you have a 3-to-1 risk to reward profile, so anyone who owns the common should definitely think about switching to the preferred."

But the analyst warned that the dividends on the convertible preferreds are not as secure as the coupon on convertible notes such as those from Ford rival General Motors. So while holders of the common who switch to the preferreds may not be that much worse off if the dividend were suspended, current holders of the preferreds have reason to be concerned.

"This is not the same trade as the GMs," the analyst said. "This is a convertible preferred, so the company can defer the dividend any time they want to. The dividend deferment feature makes this a very different situation."

General Motors declines

General Motors' three convertible series retreated on Monday amid a broad-based selldown in the auto sector.

The General Motors 4.5% convertible due 2032 and putable in March 2007 (NYSE: GXM) slid 0.07 point to close at 24.58. The 5.25% convertible due 2032 (NYSE: GBM) ended at 19.73, a loss of 0.35 point, while the 6.25% convertible due 2033 (NYSE: GPM) fell 0.42 point to close at 22.48. General Motors stock (NYSE: GM) closed at $31.66, dropping 3.94% or $1.30.

"I think there's just a lot of bad news out there with Ford and Chrysler's lower forecast," a sellside convertible bond trader said.

DaimlerChrysler, one of the Big Three U.S. automakers together with Ford and Detroit-based General Motors, said Friday that it now expects a €1.2 billion third-quarter loss at its Chrysler unit. It had previously forecast a loss of €500 million. DaimlerChrysler also plans for additional production cuts at Chrysler in the third and fourth quarters.

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