Level 3 mixed ahead of presentation; GM, Ford in line on reports; Archer Daniels, Beckman Coulter active

By Kenneth Lim

Boston, Feb. 25 - The convertibles market began the week on a quiet but slightly positive note as investors watched on the sidelines amid developing stories at bond insurers Ambac Financial Group Inc. and MBIA Inc.

"There's nothing happening here, there or anywhere," a Connecticut-based trader said. "It's extremely quiet."

The trader said many investors were waiting for details on an expected bailout of bond insurer Ambac. Reports emerged as the previous week ended that Ambac could raise about $3 billion in a deal involving regulators, banks and other investors.

"Everybody's waiting now to see what this brilliant plan the banks have for Ambac," the trader said. "The banks are a crucial underpinning to every market, and if Ambac and MBIA get into trouble you could be looking at another massive, who knows, $70 billion to $80 billion of writedowns. They've already had all these big writedowns, and another one would just put more stress on the market. A linchpin of the market is in real distress right now, and everybody's concerned."

The Street got a boost from the credit agencies in the afternoon. Standard & Poor's on Monday affirmed its AAA rating on Ambac and MBIA.

MBIA, which had been on review for downgrade since Jan. 31, was taken off review, although S&P maintained a negative outlook on Armonk, N.Y.-based MBIA. New York-based Ambac remains on review for a downgrade despite the rating affirmation.

A sellside convertible analyst said the Ambac bailout and ratings are unlikely to directly affect convertible investors, but they contribute to the sea of credit issues that investors must navigate.

"They're paying attention to it as much as it will help add some strength to the shaky credit markets, but it doesn't necessarily have a direct effect on the convert market," the analyst said. "But it has pretty significant implications overall. MBIA's rating was affirmed, that's helped the market move higher, so yeah, it's obviously something the market's got to keep an eye on."

"There are so many credit issues out there, the auction-rate securities, the insurers, all the different credit markets, a lot of them are somewhat tenuous right now," the analyst said.

ADM dips

Archer Daniels Midland Co.'s 0.875% convertible senior note due 2014 eased slightly at 120.2 against its closing stock price of $44.83 as the stock (NYSE: ADM) rose 0.56% or 25 cents.

"We saw some buy interest in Archer Daniels, but it's been pretty quiet here so far," a sellsider said.

Archer Daniels is a Decatur, Ill.-based agricultural products processing and agricultural services company.

Fullerton, Calif.-based Beckman Coulter Inc., a maker of biomedical testing systems, saw its 2.5% convertible senior note due 2036 slip 1/8 point outright to end marked at 112.6 against a stock price of $67.81. Beckman Coulter stock (NYSE: BEC) close at that level, higher by 0.91% or 61 cents.

Level 3 mixed but active

Level 3 Communications Inc. came away mixed as a weak common stock took its toll on the bonds ahead of an investor presentation.

Level 3's 6% convertible due 2009 lost ½ point outright, marked at 92.5 against the closing stock price of $2.23. Its 6% convertible due 2010 gained ½ point to 86.8 against the same stock price. Level 3 stock (Nasdaq LVLT) finished the day lower by 3.04% or 7 cents.

"Level 3 credit was a little weaker today," a sellside desk analyst said. "The stock's been weaker, and we've seen some weakness especially the longer term bonds. I think the stock started close to a 52-week low, and the bonds came in a couple of points today."

Level 3, a Broomfield, Colo.-based provider of internet backbone services, will be making an investor presentation on March 3.

Another sellside convertible analyst said there is no indication of what the company will say at the presentation, but noted that at a previous call with analysts the company addressed some provisioning issues related to its numerous acquisitions. That matter has mostly been sorted out, and the company's credit profile has not changed significantly in recent days, the analyst said.

The Level 3 convertibles that come due in 2009 are doing "really well," partly because the company could be planning to redeem them, the analyst said.

"They'll probably have to do some sort of capital market transaction to take those out," the analyst said. "This really starts a lot of their refunding. They're going to have to do something for the '09s, then the next is the subs of March 2010...They're hoping to be closer to free cash flow positive, and they have a lot of debt."

The analyst said the company is operationally on good footing.

"The end markets are good," the analyst said. "They just have too much debt."

Auto makers track stocks

Auto maker General Motors Corp.'s convertibles tracked their underlying stock, which slipped early in the day on an analyst's downgrade but recovered in the afternoon as the broader market rallied.

"The GMs were in line," a sellside convertible trader said. "The GM credit isn't worth much anymore, so you're going to see these pretty much in line with the stock most of the time. It's not very active these days."

Deutsche Bank equity analyst Rod Lache on Monday downgraded Detroit, Mich.-based General Motors stock to hold from buy, citing increasing fears for the North American auto industry.

"We've grown increasingly concerned that the cyclical downturn in North America could be deeper and more protracted than previously expected," Lache wrote in a research note.

General Motors' 4.5% convertible senior debenture due 2032 (NYSE: GXM) closed at 18.90, down 0.1 point outright, against the closing stock price of $24.20. General Motors stock (NYSE: GM) up by 12 cents or 0.5%. The General Motors 5.25% convertible senior debenture due 2032 (NYSE: GBM) gained 0.02 to close at 18.40, while the 6.25% convertible senior debenture due 2033 (NYSE: GPM) ended at 19.66, up by 0.09.

Despite his change in opinion on General Motors, Lache kept his buy recommendation on Ford Motor Co.'s common stock, saying the company had "compelling fundamentals" and was one of the most defensive auto stocks available.

Ford's 4.25% convertible senior note due 2036 rose 3 points outright on Monday as the stock following the report and news of progress in the Dearborn, Mich.-based auto manufacturer's attempts to sell two of its brands.

The 4.25% convertible was marked at 96 bid, 96.5 offered against Ford's closing stock price of $6.46. Ford common stock (NYSE: F) increased 21 cents or 3.36%.

Ford and India's Tata Motors Ltd. could announce Ford's sale of its British brands Jaguar and Land Rover on March 5 or 6, union official Dave Osborne told the media on Monday. Ford has been trying to sell the brands since 2007 as it seeks to restructure the company to focus on its core North American brands.

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