ProLogis gains on asset sale; CIT rises on TARP nod; Ford, GM slip outright, steady hedged on rating cuts

By Kenneth Lim

Boston, Dec. 23 - ProLogis was a positive story in an otherwise quiet session for the convertible markets on news of a significant capital raise.

ProLogis said Tuesday that it will sell some Asian assets for $1.3 billion to reduce debt, although the company did not say which debt it is targeting.

CIT Group Inc. also had a positive session, gaining after the company received approval to get $2.33 billion from the government's bailout program.

Automakers Ford Motor Co. and General Motors Corp. were lower with their stocks following credit rating downgrades, but the cuts did not surprise the markets and their convertibles held up in line.

Quiet session

The convertible market had a generally slow session, market sources said.

"The phones were ringing a little bit this morning, but it's kind of dead now," a sellside desk analyst said in the afternoon.

A convertible trader said volume was more active in the morning in reaction to news that came overnight.

"I think people were mostly doing small adjustments due to some news here and there, but otherwise it's really quiet," the trader said. "It's the holidays and unless something major happens I don't expect to see a lot happen this week. Tomorrow's going to be even worse."

ProLogis gains on asset sale

The ProLogis 2.25% convertible due 2037 gained about 5 points outright after the company said it was raising $1.3 billion to reduce debt.

The convertible traded at 42 with the stock at $11. ProLogis common stock ended the day at $10.10, up by 10.26% or $0.94.

ProLogis is a Denver-based real estate investment trust the focuses on industrial distribution properties.

The company said Tuesday that will sell its operations in China and property fund interests in Japan to affiliates of GIC Real Estate, the real estate investment arm of the Government of Singapore Investment Corp, for $1.3 billion in cash.

The assets are being sold at a 4% to 6% discount to book value, and closing is expected in January 2009. Proceeds will be used to reduce debt.

"In one substantial step, this transaction helps ProLogis de-lever its balance sheet, relieve near-term re-financing pressure and enhance liquidity," ProLogis chief executive Walter C. Rakowich said in a statement. "Selling our China operations and our investment in the Japan funds was not an easy decision; however, this represents a major milestone in the implementation of the plan we outlined last month to strengthen the company's balance sheet in order to meet the challenges of the current environment."

The market generally welcomed the move, a sellside convertible trader said.

"It looked like a positive," the trader said. "They're going to use the cash to take out some of their debt, so they could redeem some of the debt that's due or maybe do some buybacks. If they make an offer for the converts, you'll probably get a something in return for accepting. Even if they don't buy back the converts, because they have less debt on their books that improves their credit for everyone else."

The company did not say how it will reduce its debt. In its latest financial report, the company said it had about $11.1 billion of debt as of Sept. 30, 2008.

An analyst noted that the company has about $350 million of debt that will be due in 2009, and ProLogis could be hoping to pay those off with the cash it is raising.

"That's probably what they're going to do, but that still leaves almost $1 billion, and I don't know how they'll be using that $1 billion," the analyst said. "If their objective is to reduce debt and lower interest expense, some of their non-convertible debt may higher on their list because the convertibles generally aren't that costly for them."

The analyst agreed that the asset sale and the expected debt reduction will help the convertibles nevertheless. The discounted pricing for the assets also was not a concern, the analyst said.

"I don't think that's very surprising," the analyst said. "There's probably a discount worked in because of current market prices and the fact that they're raising a lot of money from this deal. Overall it's still a positive deal because they'll reduce their debt, which will improve their liquidity, and it might lower their cost of funding when the markets pick up again."

CIT gains on TARP nod

CIT rallied on Tuesday after the company said it will receive $2.33 billion from the U.S. government's Troubled Assets Relief Program.

The CIT 8.75% perpetual convertible preferred rose about 2.5 points outright to change hands at 25.75 versus a $4.75 stock price. CIT common stock rose 10.59% or $2.49 to close at $26 Tuesday.

CIT is a New York-based commercial bank holding company.

"CIT did move up a little, it's got that new TARP money coming in, so it had that bounce off the TARP today," a convertible trader said. "It's become quite a common sight nowadays, whenever a bank gets approved for this TARP funding, it goes up. It doesn't always last, so we'll see."

Under the TARP agreement, CIT will issue preferred stock and warrants to the U.S. government in exchange for the $2.33 billion in cash.

"Anytime these financial companies raise cash, it's usually a good thing for convertibles," the trader said. "They're issuing preferreds and they have a share offering to raise capital, and they're all junior to the convertibles, so it's a nudge in the right direction for the convertibles."

Autos lower outright on cut

Automakers Ford and General Motors saw their convertibles decline outright on Tuesday following credit rating cuts, but the paper held steady on a hedged basis.

Ford's 4.25% convertible due 2036 eased about 4 points outright to trade at 24.75 versus a stock price of $2.15. Ford common stock fell 15.44% or $0.40 to close at $2.19.

General Motors' 5.25% convertible due 2032 eased by about ¼ point to trade at 3.25 versus a stock price of $3, while the 6.25% convertible due 2033 was at 3.75 and the 1.5% convertible due June 2009 was seen at 7.5 all versus the same stock price. General Motors common stock dropped 14.77% or $0.52 and settled at $3.

Dearborn, Mich.-based Ford and Detroit-based General Motors are automakers.

Moody's Investors Service downgraded Ford's corporate family rating and probability of default rating to Caa3 from Caa1 on Monday with a negative outlook. The credit ratings agency said Ford could be dragged down by troubles at General Motors and Chrysler, and will likely have to restructure its debt in order to win concessions from its unions.

Standard & Poor's Rating Services cuts its issue-level ratings on General Motors unsecured debt to C from CC and lower the recovery rating to 6 from 4. S&P said the cut was a reflection of the risk that unsecured debtors would fall further down the hierarchy if General Motors had to take on secured debt outside of the United States.

A convertible analyst said many convertible holders are still hedged.

"People think there's some recovery value in the debt, even the unconvertible debt," the analyst said. "If the stock goes to zero, you still have some chance to get something back from the bonds."

The ratings cut was not a major concern, the analyst said.

"I don't think it's news to anybody really," the analyst said. "It's one thing where a company is going from investment grade to sub investment grade, then you have some forced selling...But you're talking about CC to C, I don't think it makes that big of a difference."

Mentioned in this article:

CIT Group Inc NYSE: CIT

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

ProLogis NYSE: PLD

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