Outrighters should look to sell Ford 6.5% trust preferreds, risk arbs should wait, Lehman Brothers says

By Evan Weinberger

New York, July 9 - Outright investors should aim to take as much profit as they can on Ford Motor Co.'s 6.5% convertible trust preferred securities due Jan. 15, 2032 in the wake of the announcement of the company's recent tender offer, according to an analysis by Lehman Brothers released Monday.

But outright investors shouldn't abandon Ford altogether, as the investment bank's analysts are advising investors who sell their stakes in the trust preferreds to get in on Ford's 4.25% senior convertible notes due Dec. 15, 2036.

Risk-arb investors should hold off and make their decision closer to the July 31 deadline for accepting the offer, the investment bank's convertibles analysts added.

"The preferred will most likely continue to trade efficiently to the tender offer implied value, barring substantial decline in the common stock price, from now through the 7/31 deadline," analysts Venu Krishna, Manoj Shivdasani and Brendan Lynch said. "Through the tendering period, outright investors will be exposed to stock risk resulting in an unattractive risk/reward profile."

Hedged investors, the analysts continue, should wait until closer to July 31 to decide what to do with their trust preferreds. Waiting will allow investors to more accurately compare the value of the trust preferreds using the July 31 Ford common stock price compared to the estimated value of the trust preferreds on July 31. Hedged investors should maintain a full stock hedge using the base conversion ratio plus an approximation of the premium shares using the current stock price as a substitute for the VWAP.

"This should allow the position to profit should Ford stock drop by a sufficient amount in the two-day window (between the end of the VWAP period and 7/31) that it becomes economical for investors not to tender the preferred," the analysts said. "In that case, hedged investors would profit by paring their short stock position back to a standard delta neutral hedge," they added.

Ford announced conversion offer on July 2 the for the trust preferreds, which were originally offered in 2002 and have an aggregate liquidation value of around $5 billion, then a record for the size of a convertible offering. The conversion offer expires at 5 p.m. ET on July 31 and the settlement date is expected to be three days after closing, or Aug. 3.

Holders of the trust preferreds will receive 2.8249 shares, the base conversion ratio, plus a share premium that will be calculated based on Ford's $14.25 offer for issues of the trust preferreds divided by the three-day value weighted average price of Ford common stock starting July 25 and ending July 27.

The trust preferreds have a $50 par. Ford 6.5% trust preferreds (NYSE: F-PS) closed at $38.90 versus $9.64 in Ford stock on July 2 before the announcement. They had a 42.8% premium at that time. According to Lehman's calculations, the offer is an approximately $2.58 premium to the July 2 close, with the $9.64 stock price standing in for the three-day VWAP.

Investors will have to consider the number of shares they will receive by tendering; the total conversion value including premium shares on July 31; and the credit spread assumption if the trust preferreds remain outstanding and not tendered, the report added. Investors may also want to consider future expectations for the credit post-tender offer and expectations for Ford stock.

If all of the trust preferreds are tendered, Ford stands to save around $325 million in annual interest costs, Lehman estimates, which should translate to a $213 million improvement to the Dearborn, Mich.-based carmaker's net income. Share count is expected to increase by 400 to 500 million shares, or 22% to 28% of the outstanding shares.

Lehman Brothers reported Ford's 4.25% senior convertible notes at around 123.125 versus a $9.15 stock price. At last look, the notes traded at 122.5587 versus a closing stock price of $9.08 Monday.

"I think they're pretty spot on, for outright," one buyside analyst said of the Lehman Brothers report.

A second buyside analyst said it looked like the Ford trust preferreds were trading to exchange, but that some investors might choose to hold their issues. "Some people might like the coupon, so I'm not sure it's all going to move," he said.

Ford trust preferreds finished Monday at $39.77, down $0.06, or 0.15%. Ford stock closed at $9.08, down $0.03, or 0.33%.

© 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.