Convertibles mostly steady; Ford settles little changed, but GM gains; investors eye Prudential put

By Rebecca Melvin

New York, Dec. 2 - Ford Motor Co.'s convertibles ended a little lower on the day Tuesday but still up considerably from recent lows; while General Motors Corp.'s convertibles jumped by double digits as the Detroit Three presented turnaround plans to Congress in a renewed bid to garner billions of dollars in bailout loans from Washington.

The plans were unveiled as poor U.S. automotive sales estimates for November hit the tape. GM's light-vehicle sales in the United States for November fell 41%, while Ford's sales dropped 31% as consumer demand for new vehicles dropped to their lowest level in 26 years, according to Autodata Corp.

"Ultimately the companies aren't in great shape and it's not a good long-term investment," said a New York based buysider, who focuses on good to improving credits.

Prudential Financial Inc.'s floating-rate convertibles were among the most active names in trade Tuesday, with prices mostly steady. The shorter-dated paper, with a put in less than two weeks, has been edging toward par, and the six-month paper was mostly steady in the 86 bid, 87 offered context.

Convertibles players Monday and Tuesday noted that in general better credit quality names are recovering, while poorer credit quality names continue to wallow in the mud.

Big, liquid names like Amgen, Transocean, and EMC - where the equity option is practically free - are not as cheap as they were a month ago, the New York buysider noted.

He called the current period a "quiet time," in which opportunities are being picked over.

"Everything gets sold off together when the market drops 8%, and you can find gems ... we look to switch into names with lower conversion premiums to take advantage if the market rebounds," he said.

On Tuesday, equities recovered from Monday's huge sell-off, leaving the Dow Jones Industrial Average up 3.3%, or 270 points, at 8,419; the Nasdaq Composite index up 3.7%, or 51 points, at 1,449.8; and the S&P 500 index up 3.99%, or 32.6 points, to 848.81.

Ford settles little changed

Ford's 4.25% convertible bonds due 2036 closed at about 29.7 bid, 30.7 offered Tuesday versus a stock price of $2.70, compared with trades at 32 on Monday and trades at 30 on Friday. Those prices were up from prices languishing in the 17 bid, 20 offered range in the last half of November.

Ford common stock settled at $2.70, which was up 15 cents, or 5.88%.

Ford told lawmakers it does not need federal funds immediately but asked for a $9 billion line of credit to be available in case the recession is longer and deeper than expected.

The Dearborn, Mich.-based automaker also said it plans to have a full battery electric car to market by 2011 and that the loss-making carmaker will be break even or profitable in that year.

Also, it is investing $14 billion in U.S. plants and efficiency, selling its corporate aircraft, and that chief executive Alan Mulally will take a salary of only $1 a year if the company is given access to government funds.

"Their stocks have gone down a lot, and these are highly leveraged companies both financially and operationally, and any downturn in credit markets is going to affect them doubly," a convertibles buysider said.

The convertibles and the preferreds probably have little value if the bank debt isn't made whole, he said.

"The stock is a warrant on the survival on the company. When the convertible trades at say 30 cents and the bank debt trades at 40, the bonds aren't worth anything if the bank debt is not made whole," he said.

Because there are so many "good companies for sale," he'd rather look at those than the most levered credits. At the same time, he noted, if there's a bounce, names like Ford and GM will rebound the most, and given that they're big components of some indexes, if they rally, then he might underperform the benchmark, he said.

Gains in General Motors' B and P convertibles outstripped their underlying shares.

The GM 6.25% convertibles due 2033 (GPM) closed at $3.72, which was up 40 cents, or 12%, in heavier-than-average volume.

The GM 5.25% convertible due 2032 (GBM) closed at $3.60, which was also up 40 cents, notching a 12.5% gain in lighter-than-average volume.

GM common stock settled at $4.85 on Tuesday, up by 5.7% or $0.26.

Detroit-based GM said it needs $12 billion immediately plus a $6 billion line of credit. The urgency of GM's request stirred up new worries that GM may have to file for bankruptcy protection.

GM also said it may sell its Saab division and could sell or consolidate its Saturn brand and trim its vehicle line up to about 40 models from 60 models.

Prudential steady, active

Prudential's floating-rate convertible due 2036 traded steady to higher at 98.875, a New York-based sellside trader reported via e-mail.

The Prudential floating-rate convertibles due 2037 traded mostly at 87 bid, 87.25 offered.

Prudential's common stock settled at $19.11, which was up $1.96, or 11.4%.

Convertibles players have contemplated what would happen if the Newark, N.J.-based insurance and financial services company sweetened the put on the '36s to keep them outstanding when they become putable this month.

But the company hasn't indicated that it is inclined to do so, and it is getting too close to the put date for them to be able to do so.

It would make the longer-dated paper more interesting if they were to sweeten the earlier paper because it would leave more resources available, increasing the probability that the six-month put would be paid.

Other puts have been sweetened of late including Merrill Lynch's and Omnicom's.

Given the pricing on the Prudential paper due 2036, it seems as though investors are confident about being paid back this month for the paper if they put it. But the waters are uncharted, a buysider said, referring to AIG and the fact that MetLife "isn't acting too well."

Questions about what will happen when the put comes and whether it will be paid are difficult to predict. "Some investors may roll into the other one since the fact that they've been able to pay one may mean they'll pay the other one," the buysider said.

But it really depends on what happens in the market. "It's a different trade. The difference between a 15-day put and six months is quite large," he said.

Mentioned in this article:

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Prudential Financial Inc. NYSE: PRU

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