Ford's $3 billion convertible a magnet for full spectrum of investors

By Ronda Fears

Nashville, Tenn., Jan 17 - Investors were racing to snap up Ford Motor Co.'s eagerly awaited $3 billion convertible trust preferred after the flag was waved Thursday by virtue of the deal launching with price talk, which offers 7.0% to 7.5% yield and an 18% to 22% initial conversion premium. In the gray market, the issue was quoted at the close 1.375 to 1.5 points over the issue price of 50.

It is a race that is drawing a full spectrum of investors - outright convertible funds, hedge funds, institutional equity funds and even retail accounts. And, market buzz suggested, Ford might even upsize the deal because of strong demand to something like $5 billion, which would make it the biggest convertible ever issued. All despite the Moody's downgrade of Ford to Baa1, which follows a Fitch downgrade to BBB+ and S&P revising its outlook for Ford to negative last week.

"It's going to be a cat fight," said a convertible trader at a hedge fund in New Jersey. "It's cheap, but it's going to be tough because you're be competing with all these other guys to get in."

Analysts roughly estimate the Ford deal would be 8% to 12% cheap to fair value.

A sell-side analyst working closely with the deal said institutional equity funds were already lining up for the Ford deal and there were signs that there would be a strong interest from retail investors, as well as the traditional convertible and arbitrage investors. A good deal of the equity interest has been generated by Ford cutting its common stock dividend, the analyst said.

Credit analysts agree the convertible would serve as a liquidity cushion for Ford, but the agencies are still pessimistic about the credit. Moody's noted that the majority of the benefits anticipated from Ford's turnaround plan would not be realized until 2004 or 2005. Furthermore, Moody's said competitive conditions, along with the protracted nature of the plan, will result in a significant cash burn during 2002 and 2003 and debt protection measures will be very weak for the current rating level.

Investors are liking the Ford deal because of a hefty yield income, the low premium range and five years of call protection for the 30-year paper. In addition, many made money on the automaker's convertible preferred in the early 1990s, which was part of the company's last turnaround effort.

"I can tell already it's going to be a home run. The whole gamut of players are in the deal, it's a household name," said John Seibel, a convertible trader at Silverado Capital Management.

"It's very attractively priced, not as attractive as Lucent but it's a better credit and Ford's problems are more correctable than Lucent's."

Several market watchers were comparing the terms on the Ford deal to that of Lucent's 8% convertible trust preferred in August and Xerox's 7.5% convertible trust preferred in November. But not everyone thinks it's a good comparison, since Lucent's convert is rated B3/B- and Xerox's is at B2/B while the Ford deal was rated BBB- by Standard & Poor's Thursday. The initial conversion premiums were richer on the previous deals, also, with Lucent's at 22% and Xerox's at 25%. Xerox also collateralized the first three years of dividend payments with Treasury notes.

"They are treating it like junk and, certainly, the pricing expresses concern about further downgrades. People are aware of the fact that the Ford dividend was lowered but it could be changed. I am loath to compare the Ford deal to Lucent or Xerox. For one thing, Ford is not having to put up escrow," said Anne Cox, head of global convertible research at Merrill Lynch.

"This is definitely the shape of what we're going to see in convertibles this year - re-equitization. This is pretty expensive capital for the issuer."

There is also some concern about the dilution of Ford stock because of the huge number of shares underlying the convert, which is estimated somewhere in the neighborhood of 100 million shares. A fair amount of trepidation also centers around the final deal size.

"It has to be priced to go based on the size, and it certainly is," said a sell-side analyst working on the deal. "There is concern about the huge number of shares involved and the real deal size. There is talk that it could go up to $5 billion, but I don't know if it would be wise for Ford to do so."

Goldman Sachs is running the books on the deal, with Morgan Stanley, JPMorgan and Salomon Smith Barney as joint lead managers. It is set to price after the market close next Thursday.

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