Ford upsizes convertible deal to a record $4.5 billion, tightens price talk

By Ronda Fears

Nashville, Tenn., Jan 23 - Investors were disappointed Wednesday as the price talk was tightened on the upcoming Ford Motor Co. convertible deal, as it was upsized to a record $4.5 billion from $3 billion amid market buzz of demand in the neighborhood of $18 billion. The yield was brought in to 6.25% to 6.75% from 7.0% to 7.5%, and the premium guidance was revised to 20% to 25% from 18% to22%. Immediately, the new terms put a squeeze on the paper in the gray market, pulling it in from about 1.375 points over par to about 0.5 point over par.

"We are not too pleased, obviously, since this big a deal should be cheaper. This big a deal should be much cheaper," said a convertible trader at a hedge fund in New Jersey. "It's the wrong price for $5 billion."

With the greenshoe, the Ford deal will right at, if not over, $5 billion - setting a new record amount for a convertible. According to Prospect News data, the largest U.S. convertible offering thus far is Tyco's 0% due 2020 in November 2000 for $3.45 billion in proceeds.

Many market watchers were excited about the size of the deal because of the record, but players were a bit concerned about how the size would affect the liquidity of the paper in the aftermarket. And, a convertible trader at a hedge fund in New York noted that the bigger deal size will make managing the stock risk tricky for arbitrageurs.

"I don't think they left a lot on the table," said one market observer familiar with the Ford deal. "People probably could've swallowed one or the other - either revised price talk or an upsizing - but both together is a bit much for some to swallow."

Interest in the Ford deal has drawn a broad spectrum of investors - outright convertible funds, hedge funds, institutional equity funds and even retail accounts. Sources familiar with the deal suggest that the biggest percentage of the Ford deal will be going to hedge funds, however. Syndicate sources working closely on the deal claim that demand is running about six times the original $3 billion, or $18 billion.

"We're not really surprised," said a hedge fund trader in New York. "It was trading at 51.375 before the new terms and now it is trading at 50.625. It still looks fairly cheap."

The 30-year convertible trust preferred deal is set to price after Thursday's close. Goldman Sachs & Co. is running the books on the deal, with Morgan Stanley, JPMorgan and Salomon Smith Barney as joint lead managers.

Ford shares closed up 11c to $14.54.

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