General Motors, Ford gain on GM-Chrysler merger talk; Red Hat, NII better; but Newmont weaker

By Rebecca Melvin

New York, Oct. 29 - General Motors Corp.'s convertible bonds gained by double digits in strong volume Wednesday amid reports that the troubled automaker has resolved some roadblocks with Cerberus Capital Management, owner of Chrysler, over a possible merger of the two car makers.

Ford Motor Co. also gained as sentiment toward the sector improved mildly, sources said.

Convertibles saw better pricing in general; they followed stocks up during the session, and didn't weaken later despite equities' profit-taking selloff into the close. And volume is also picking up.

"We've started to see a bit of life. It seems like things were up in general," a New York-based sellside trader said.

But price richening has not flowed through the whole market, sources noted.

Red Hat Inc., which is seen as a safe haven in convertibles, was firm to slightly better in trade, and NII Holdings Inc., influenced by a jump in its underlying share price, was solidly higher.

Newmont Mining Corp., which reported lower third-quarter earnings on higher costs, was weaker, however.

Also during the session, the Federal Open Market Committee announced that it decided to lower its target for the Federal funds rate by 50 basis points to 1%.

The cut followed swiftly on the heels of an FOMC rate cut taken three weeks ago in concert with other central banks.

In a statement accompanying the cut news, the FOMC said that the pace of economic activity appears to have slowed markedly due in large part to a decline in consumer expenditure.

In addition, business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.

It noted, however, that the credit crisis should improve over time given recent policy actions, including Wednesday's interest rate cut, extraordinary liquidity measures and official steps to strengthen financial systems.

Convertible players were of the opinion that the action "couldn't hurt," but neither did they think it would help that much.

"The implied Fed funds rate was already around 1%. It's another example of the Fed trying to stabilize the markets. Whether it will work or not remains to be seen," a New York-based sellside trader said.

GM gains amid merger talk, earnings

GM's 5.25% convertibles due 2032 (the GBMs) gained $0.815, or 14%, to close at $6.625 versus a closing share price of $6.76.

The GM 6.25% convertibles due 2933 (the GPMs) gained $0.87, or 15.3%, to $6.5501. And the GM 1.5% convertibles due June 2009 (GRMs), due next summer, traded up to 16.82, up $1.87, or 12.5%.

All three of the senior convertible bonds, with a total face of $8.4 billion, outperformed their underlying shares, which were up 8% on the day.

Ford Motor's 4.25% convertible bonds due 2036 traded higher at 26.75, and were seen closing at 26 bid, 27 offered, versus a closing share price of $2.16.

"People think it's a necessary deal," a sellsider said of the potential GM-Chrysler linkup. GM is "a bankruptcy that can't happen, so it's neither here nor there whether the deal is a good idea, the government is not going to let it fail."

According to merger talk reports Wednesday, it has been agreed that GM Chief Executive Rick Wagoner would lead the combined GM-Chrysler automaker. A merged GM-Chrysler would be the largest automaker by global sales.

As GM talks with Cerberus progressed, the car maker was also seeking some $10 billion in U.S. government aid to support the deal.

Also Wednesday, GM reported sales that were down 11% as demand in the United States and Western Europe weakened, but strength in Latin America and Asia helped offset that weakness.

Sales outside of the U.S. grew by 164,000 vehicles in the first nine months of the year. But North American sales dropped 18.9% during the quarter, and European sales fell 12.3%.

For the quarter, GM sold 2.11 million vehicles, compared to Toyota's quarterly sales of 2.24 million.

The results bring GM's total sales for January-September to 6.66 million vehicles compared with Toyota's 7.05 million.

Independent research firm CreditSights said the buzz around GM linking up with Chrysler reflects the reality that the legacy Big 3 automakers, or the Detroit 3 (D3), as they are now often referred to, are going to have to dig much deeper to find solutions to the current credit crisis.

The domestic industry has dug pretty deep in past crisis cycles and most notably in the government bailout of Chrysler via loan guarantees for warrants, CreditSights said.

And in the early 1990s, GM had to toss out senior management and initiate a comprehensive restructuring and asset sale (and pension contribution) program that kept the company from running out of cash by 1993.

But that restructuring was fortuitously well-timed with cyclicality. Today there is no such luck. "If anything 2009 will get much worse globally for autos. The breadth of the current financial market crisis and industry setbacks is taking the pain to an all-new level," the CreditSights report said.

It pointed out that the post Lehman market has not been kind to automakers, with GM and Ford stocks having fallen much further compared to the overall S&P 500 index downturn.

The secured loan market is virtually closed to the D3 OEMs, and GM cannot get a loan despite its massive base of unencumbered assets, CreditSights said.

It looks like it's going to have to take some combination of the private market solution and sweeping use of a combination of government tools to keep it from "spiraling out of control in 2009 for the manufacturing heartland," CreditSights said.

Red Hat firm, NII better

Red Hat's 0.5% convertibles due 2024 traded firm in active trade at 98 bid, 98.125 offered, compared to sales with a 97 handle in the previous session.

Shares of the Raleigh, N.C.-based Linux software provider software company closed up 38 cents, or 3%, at $11.96.

It's viewed as a safe haven, as the company continues to have large cash position, and very short term. "They come due Jan. 15. It's not a super sexy trade, but with the defined period you're sure to get your money back and that's desirable in this market," a sellsider said.

Traders cited NII Holdings as "interesting."

The NII 3.125% due 2012 had been trading around 50, but on Wednesday moved up to 51.5 on an outright basis.

The NII 2.75% convertibles due 2025 got up to 74 bid on Wednesday, compared to a 71.5 print on outright basis Tuesday, versus a stock price of $17.94 at the time.

The Reston, Va.-based wireless services provider's shares gained $2.82, or 15%, to $21.60 on Wednesday.

Newmont weakens after earnings

Newmont Mining's 1.625% convertible senior notes due 2017 were indicated to close at 70 bid, 71 offered on Wednesday, while its 1.25% convertibles due 2014 were seen at 75. Shares of the Denver-based copper and gold mining company were down 57 cents, or 2%.

The Newmont convertibles weakened as investors peeled out of the name which had been bought earlier this year with the idea that gold would be a safe haven in a big downturn, a sellsider said.

But gold prices have been weak recently, and Wednesday's earnings disappointment spurred investors to sell.

"People that hedged see that it didn't hold well. There were better sellers after earnings. Although the stock didn't do much, people were peeling out," the trader said.

Newmont reported net income of $196 million, or 43 cents a share, compared to net income of $397 million, or 88 cents a share, for the same period last year.

Income from continuing operations in the most recent quarter was $177 million, down from $331 million a year ago. Revenue dipped to $1.4 billion from $1.6 billion

Newmont blamed the third-quarter decline on higher production costs and lower copper sales.

On a conference call, company executives said they are reviewing budgets and may delay some projects due to an operating environment in which there is extreme commodity price volatility, mass portfolio liquidation, global inflation and limited, if any, access to capital.

Mentioned in this article:

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Newmont Mining Corp. NYSE: NEM

NII Holdings Inc. Nasdaq: NIHD

Red Hat Inc. NYSE: RHT

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