Ford action revs up, converts add 2% on huge volume; Men's Wearhouse gains to 104, Beverly to 103.75

By Ronda Fears

Nashville, Oct. 16 - There was a mad scramble among convertible players grabbing new paper offered up by Men's Wearhouse Inc. and Beverly Enterprises Inc., as both were bid up out of the gate. But the biggest volume was seen in Ford Motor Co. on its earnings.

Spreads were tighter pretty much across-the-board, and particularly in Ford paper, traders said, and that accelerated the reach-for-yield mandate that is driving the market.

Shaw Group Inc.'s converts also moved up by 1-2 points to 66 bid, on the company's plans to issue stock to pay the likely put in May 2004, while the stock fell more than 6% on the news.

It was a busy day at most convert desks, but several traders were heading out again - without need to leave early - to Yankee Stadium for game seven in the American League playoffs for a World Series opponent to the Florida Marlins from the National League after the Chicago Cubs lost Wednesday night.

"In the grab for yield, the market is getting pretty rich but for the most part we still see the market better bid," said a dealer at one of the bigger sellside convertible desks.

New paper also put a breath of fresh air into the market.

Men's Wearhouse priced at the aggressive end of tightened guidance and still traded up to close at 104 bid, 104.5 offered with the stock better.

Beverly Enterprises sold smack in the middle of price talk and it too headed higher in the immediate aftermarket, ending the session at 103.75 bid, 104.25 offered.

Many established convert players didn't get involved in either deal, and some speculated it was new money chasing the new paper.

"We decided not to play either Men's Wearhouse or Beverly Enterprises," said Ted Southworth of Chicago-based Northern Trust Co., who also was lamenting the Cubs' loss.

"I didn't like the valuations longer term, and couldn't get too excited about playing for a flip. I've been focusing mainly on individual accounts lately, spending less time on converts. That could change soon."

A nice forward calendar would do it, as far as getting more involved with converts, he said. As to the Cubs, Southworth said: "Well, I guess it's wait until next year."

A year back, when Ford reported third quarter 2002 results, it sparked a widespread panic in the credit markets. Thursday when Ford beat analysts' expectations and pumped up its outlook going forward, the reaction was much the same, traders said, but as one put it: "This time, the frothing was buying frenzy."

Ford's 6.5% convertible trust preferred gained 0.85 point, or 1.81%, to 47.75 on the New York Stock Exchange, with volume spiking to 3.14 million shares versus the running average of 423,741. The underlying stock was just as active, moving 22.6 million shares versus the average 8.5 million.

Ford shares closed up 20c, or 1.65%, to $12.34.

The results from Ford "only served to propel the ongoing credit rally," said Banc of America Securities global markets analyst David Goldman.

Spreads on Ford's straight debt came in 10-20 basis points, convert traders commented.

Similar moves were noted in General Motors Corp. paper, but only the 4.5% and new 6.25% converts saw much action. GM reported third quarter results Wednesday and the reaction was tepid, traders said, as its financing arm carried plunging profits in its automotive lines.

GM's new 6.25% convertible notes due 2033 edged up 0.14 point, or 0.5%, to 28.15 on the NYSE on volume of 3.36 million shares versus the average of 2.34 million. The 4.5% convertible notes due 2032 moved a slight 0.06 point higher, or 0.24%, to 24.95 on the NYSE on volume of 3.12 million shares versus the average of 262,486. Both converts have a $25 par.

GM stock gained 28c, or 0.64%, to $43.83.

A buyside trader, however, noted that much of Ford's success was due to lots of layoffs and plant closings, with recent production cutbacks announced - at GM, too - and that has trickled down to component makers like Tower Automotive Inc., which issued an earnings warning Thursday.

Tower Automotive said its third quarter results would not meet analysts' expectations, and that led Standard & Poor's to put the credit on negative watch, including the 5% convertible due 2004 at B. S&P noted that Tower was impacted largely by reduced business levels from Ford.

Tower's convert was pegged at 97 bid, 99 offered but a sellside trader said the price reflects little to no activity in the issue and has "priced in a good deal of risk to getting paid." The stock ended up 4c, or 0.9%, to $4.47.

"The credit ratios look better at Ford, maybe, but it's still a dark picture," a trader at a big New Jersey hedge fund said.

"The production cutbacks hurt guys like Tower Automotive. And, there's Delphi, too."

Delphi Corp. reported a large third quarter loss Thursday amid restructuring charges and some 8,500 new job cuts. Delphi, formerly a subsidiary of GM, has cut more than 17,500 jobs since 2000.

The Delphi news, the trader said, "in turn, puts a big question mark on names like Sirius Satellite and XM Satellite Radio because Delphi makes their products."

Sirius and XM converts were both better in tandem with the stocks moving up, and high-yield traders were talking about both convertible issues.

Traders at a couple of sellside shops active in the Sirius name alluded to "something going on" with regard to the 3.5% converts, but they were very cagey and nothing could be firmly tracked down.

"There are some heavy-weights that are involved with this name, so you probably won't hear what is going on until it's over, but something is going on with the Sirius convert," said a high-yield convert trader.

In early March, Sirius completed a $1.2 billion debt-for-equity restructuring that included 89% of its 8.75% convertible subordinated notes due 2009 - the old CD Radio Inc. convert.

The company said it got a $200 million capital injection, for common stock, from OppenheimerFunds Inc., Apollo Management LP and The Blackstone Group LP. Sirius said in early March that those funds, combined with cash on hand, would give it over $300 million in cash, sufficient to fund operations into the second quarter of 2004.

Then, in May, Sirius sold the new $175 million of 3.5%, up 22% converts.

New paper from Men's Wearhouse and Beverly was very active, even while many buyside players groaned and complained about the terms.

Men's Wearhouse sold its $110 million deal to yield 3.125% with a 42% initial conversion premium - at the aggressive end of price talk that had been tightened during marketing. Revised guidance was 3.125% to 3.375%, up 40% to 42%. Original price talk was for 3.375% to 3.875%, up 38% to 42%.

Bear Stearns, a joint bookrunner on the deal, took it out at 104 bid, 104.5 offered while the stock closed up 23c, or 0.76%, to $30.43. It had been seen late Wednesday, just before pricing, bid 2.75 points over par with an offer of 3.75 points over in the gray market.

On the original price talk, sellside analysts put the Men's Wearhouse convert 3.15% cheap to 4.19% cheap. After the revision, analysts put it from 1.2% rich to 1.6% cheap.

Beverly Enterprises sold its $100 million deal to yield 2.75% with a 38% initial conversion premium - smack in the middle of guidance for 2.5% to 3.0%, up 36% to 40%.

Lehman Brothers, sole bookrunner, closed it at 103.74 bid, 104.25 offered as the stock ended up 12c, or 2.22%, to $5.52.

Call protection was a big magnet for the Beverly deal, buyside sources said. The issue will be non-callable for seven years. Sellside analysts not involved with the deal put it from 1% rich to 4.3% cheap.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.