Ford, General Motors rally; Charter improves on outlook, refinancing; Boston Properties, Emdeon in play

By Kenneth Lim

Boston, Feb. 9 - Convertibles of automakers Ford Motor Co. and General Motors Corp. gained on Friday, following their stocks on a rally fueled by equity upgrades.

Charter Communications Inc. gained slightly outright after the company forecast growth and announced new refinancing plans and a $1.2 billion expansion of its senior secured credit facilities.

Boston Properties Inc. remained active, but slipped slightly, amid ongoing interest in merger and acquisition activity in the sector.

The rest of the convertible market had a subdued session, although traders said volume was typical for a Friday.

"It's slow, but it's always like this on a Friday," a buyside convertible trader said.

Emdeon Corp. was flat to slightly lower outright, although activity has been picking up with renewed interest in the sector. Emdeon's 1.75% convertible due 2023 was marked at 104.375 bid, 105.125 offered against a stock price of $14.27, while its 3.125% convertible due 2025 was marked at 107.5 bid, 108.375 offered versus the same stock price. Emdeon stock (Nasdaq: HLTH) fell 2.73%, or 40 cents, on Friday to close at $14.27.

A sellside trader said Emdeon, an Elmwood Park, N.J.-based provider of services to the health care industry, has received more attention because some investors think that the health care sector could be in for a shake-up.

"Some of the major states, like California, all the governors there have said they're implementing or have implemented health care systems, and the presidential candidates are all looking at health care reforms, so everything is kind of aligned for something to happen here," the trader said. "And if you look at private equity, some of the recent takeover deals have been in health care names...It's a very interesting space."

The trader added that Emdeon's 3.125% convertible has better takeover protection than the 1.75% convertible, which explained the disparity in prices.

"But that's why the 1.75% is so much cheaper," the trader said.

Ford, GM gain on upgrade

Ford's 4.25% convertible due 2036 jumped about 4 points outright, while General Motors' three convertibles also rose after Deutsche Bank upgraded their stocks.

Ford's convertible bond traded at 121 against a stock price of $8.55 on Friday. Its stock (NYSE: F) gained 2.11%, or 18 cents, to close at $8.73.

General Motors' 5.25% convertible due 2032 (NYSE: GBM) finished at 22.60 against a stock price of $36. Its 6.25% convertible due 2033 (NYSE: GPM) closed at 25 versus the same stock price. The General Motors 4.5% convertible due 2032 (NYSE: GXM), which may be put in March, closed unchanged at 25.5. General Motors stock (NYSE: GM) ended the day at $36.01, up by 6.54% or $2.21.

"Ford was active today after they got an upgrade," a buyside trader said. "They're better outright, in-line dollar-neutral."

In a research note, Deutsche Bank equity analyst Rod Lache said U.S. automakers should be able to reach a health care deal with their unions, which would be "a transformational event for the U.S. Big Three."

Citing the United Auto Workers union's deal with Goodyear Tires, Lache said the unions appear to be more open to health care settlements that will allow companies such as Dearborn, Mich.-based Ford and Detroit-based General Motors to improve competitiveness.

"The implications for industry competitiveness are significant," Lache wrote. "If they reach a health care solution, U.S. automakers would gain much more flexibility in restructuring and re-sizing their businesses for profitability. Flexibility should make these companies less risky from the capital market's perspective."

Lache raised his 12-month common stock price target for General Motors to $45 and upgraded the stock to buy. He also upgraded Ford to buy, with a 12-month target of $11.

But Lache cautioned that while a deal is likely to be reached, it may not happen this year. If no deal is reached, all bets are off.

"A central tenet of our thesis is that U.S. automakers will reach a favorable restructuring of their health care obligations," Lache wrote. "It is difficult to argue upside for the stocks without it."

A sellside convertible analyst said more caution may be prudent.

"I think one of the key assumptions was that a health care deal - a good health care deal - with the unions would be reached," the analyst said. "You kind of have to believe that to be that bullish on the stocks. But I was just checking and it looks like they're the most bullish right now. I'd be a little more cautious. Ford and GM are still facing huge obstacles in their turnaround, and costs are just one part of the problem."

Charter up on refinancing plans

Charter Communications' 5.875% convertible due 2009 improved about a quarter-point outright after the company guided for increased fourth-quarter sales and announced a refinancing plan.

The company's 5.875% convertible traded at 154 versus a stock price of $3.25. Charter stock (Nasdaq: CHTR) rose 3.08%, or 10 cents, to close at $3.35.

"Charter Communications was up slightly; [they] said they were going to refinance their debt," a buysider said.

Charter on Friday said it expects fourth-quarter revenue to increase about 10%, to $1.4 billion, on the back of a pro-forma increase in customers. St. Louis-based Charter, a broadband communications company, also plans to refinance a $6.85 billion senior secured credit facility, and expand it to $8.05 billion. The new debt will comprise a $1.5 billion revolving credit, a $1 billion term loan, a $5 billion refinancing term loan and a $550 million second-lien term loan. Charter will use some of the proceeds to redeem up to $550 million of its floating-rate notes due 2010 and up to $187 million of 8.625% senior notes due 2009.

A sellside convertible analyst said the refinancing was a positive move.

"I think it's actually positive," the analyst said. "It's going to be an improvement in their liquidity, and they'll probably be pushing back the maturities on their debts. If you're holding the 5.875% converts, you'll actually be more slightly ahead in the line in terms of maturities."

Boston Properties active

Boston Properties' recently priced 2.875% convertible due 2037 slipped about a quarter-point on Friday but continued to be actively traded in the wake of recent deals in the sector.

The convertible traded at 101.75 versus a stock price of $129.25 on Friday. Shares of Boston-based Boston Properties (NYSE: BXP) closed at $127.04, down 1.88% or $2.44. Boston Properties is a real estate investment trust focusing on office properties in the United States.

"After the EOP [Equity Office Properties] buyout, guys are taking a closer look at REITs," a buyside convertible analyst said. "Office REITs like Boston Properties in particular are benefiting a little from the valuations in the EOP buyout, and also the possibility of more consolidation in the sector."

The analyst said merger and acquisition activity continue to be real possibilities in the sector.

"I don't want to speculate about Boston Properties specifically, but it's more M&A in the sector wouldn't be far-fetched," the analyst said. "We probably won't get one the size of EOP anytime soon, though."

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