Ford lower, GM mixed; financials, Prudential under pressure; Watson Pharmaceuticals stronger

By Rebecca Melvin

New York, March 3 - Worse-than-expected auto sales data didn't drive auto convertibles significantly lower on Tuesday since convertible players are not trading those names in relation to such fundamentals anymore, a New York-based sellside trader said.

By mid-afternoon, Ford Motor Co.'s convertible bonds had edged lower by only 0.25 point and General Motors Corp.'s convertible bonds were mixed.

"They don't trade on the sales data. It all boils down to what your view is on whether these companies are going to survive or not," the sellside trader said.

Certainly the bleak sales figures - GM's U.S. light-vehicle sales fell 53% in February and Ford's sales sunk 48% - didn't foreshadow favorable futures.

Elsewhere, financial convertibles were weaker, and Prudential Financial Inc. was lower in line with pressure on the insurance sector in general.

But Watson Pharmaceuticals Inc. was stronger in fairly active trade, a New York-based sellside trader said.

Meanwhile, Delta Petroleum Corp.'s $175 million rights offering of convertible preferred shares didn't garner much reaction. It wasn't likely a back-stopped deal, and probably had no underwriters, a New York-based origination source said.

A New York-based fund manager said of the Delta offering announced late Monday: "We aren't paying any attention to this situation. But it's a small, totally busted, CCC convertible preferred issued by a cash-burning company. This is not likely to attract bids in a risk-averse market with near record-breaking credit spreads."

Convertibles were otherwise pretty quiet, traders said, even as equities struggled to notch a positive session, but in the end succumbed to further losses. The Dow Jones Industrial Average ended down 37 points, or about 0.5%, at 6,726, following about a 300-point drop on Monday.

Federal Reserve chairman Ben Bernanke and Treasury secretary Timothy Geithner responded to lawmakers in separate hearings Tuesday about government actions to date and ongoing plans to stabilize the financial system and help the economy.

Geithner said the administration was committed to turning around the "dramatically deteriorating fiscal position of our country" through policies that will create jobs and increase GDP, while also laying a foundation for investment that will make the U.S. more profitable in the future.

He defended programs like cap and trade, and tax policies such as reducing deductions for charities and closing the carried interest provision, as necessary for achieving those goals.

Ford lower, GM mixed

Ford's 4.25% convertibles due 2036 traded between 19.75 and 22 on Tuesday, with the market seen at about 20 near the close. Ford common stock closed at its session lows, down 7 cents, or 3.7%, to $1.81.

Ford February sales totaled 96,044, down a worse-than-expected 48% from the year-earlier period. In January, Ford's U.S. sales dropped a worse-than-expected 39% to 90,596 total vehicles sold, compared to 148,355 sold in the same month last year.

General Motors' 5.25% convertible due 2032, or the GBM paper, closed up 1.8% at 2.21 versus a stock price of $1.99.

The GM 6.25% convertible due 2033, or the GPM paper, closed at 2.38, which was down 3.3% on the day versus a stock price of $1.99. General Motors common stock shed 2 cents, or 1%.

GM U.S. sales totaled 127,296 vehicles for February from 270,423 a year earlier. In January, the Detroit-based car maker's light-vehicle sales plummeted 49% to 128,198 vehicles.

The auto paper trades more or less with the stock, a sellsider said.

Prudential comes in

Prudential Financial's floating-rate convertible notes due 2037 were very active Tuesday, according to a sellside trader.

The floaters settled at about 95.25, which was down from 96.5 on Monday and from 95.68 on Friday.

At 96.5, the paper's yield to put was 13.42%. The paper is putable in June.

Bernanke told Congress on Tuesday that actions taken by the government, including the bailout of American International Group Inc., however unpalatable, were necessary to stabilize the troubled financial system, adding that the economy cannot recover until that system has stabilized.

The central bank also unveiled a previously announced $200 billion Term Asset-Backed Securities Loan Facility, or TALF, program, which is intended to unfreeze the market for consumer loans, including auto loans, credit cards and student loans.

Watson stronger in active trade

Watson's 1.75% convertibles due 2023 were pretty active at 96 bid, 96.25 offered. Shares of the Corona, Calif.-based branded and generic drug maker ended up on the day in active trade as well at $25.63, up 21 cents, or 0.83%. The stock is up about 10% in the last three months.

"I always like companies with good fundamentals ... and health care is the only sector with good fundamentals amidst a global credit panic and recession," a New York-buysider said. "Health care may come and go from fashion in the markets, but health care companies usually prosper, and we're likely to do well by investing in good companies."

"WPI usually has plenty of cash flow, so it's likely to be able to fund the cash put next March on the 1.75s convertible," the buysider continued. "At a price of 96, the yield to put is only 5.8%, but that's a lot higher than cash, and the credit risk is low. The 50% conversion premium would take a miracle to be overcome in just a year, however; the stock would have to rise more than 60% to push conversion parity above par."

Some analysts think the company is a potential takeout target. They also point to recent approvals that have given a boost to Watson's branded urology franchise, while upcoming patent expirations are a positive for its generic business. In addition, the Obama administration's policies are expected to be favorable for generics.

On Feb. 19, Watson posted better-than-expected quarterly results and said its 2009 profit could be better than expected.

Mentioned in this article:

Delta Petroleum Corp. Nasdaq: DPTR

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Prudential Financial Inc. NYSE: PRU

Watson Pharmaceuticals Inc. NYSE: WPI

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