GM, Ford lower amid sales data, sector woes; Textron extends gains following debut; Mylan off

By Rebecca Melvin

New York, May 1 - Convertibles players paused Friday, digesting robust gains notched in the market for April, which came on the back of great returns for March and as equity markets also quieted ahead of the weekend.

Sellsiders said it was extremely quiet, with one quipping: "I never realized how much Wall Street celebrates May Day. I may be one of the few capitalists left! There is hardly anything trading."

Convertible research departments, on the contrary, were revved up, posting reports on convertibles performance after a hiatus of many months.

Barclays Capital research published a report that said the convertibles market had its best monthly performance in April since the bank's convertibles index was launched in January 2003.

In addition, Bank of America-Merrill Lynch equity-linked analysts published a note, saying U.S. convertibles in April rallied 9.3% on the back of a stellar 20.5% return in underlying equities, marking the second-best monthly performance since the inception of its master convertible index in 1987.

Of names in trade, General Motors Corp. and Ford Motor Co. were lower as weak monthly sales data was released and on the heels of the Chrysler LLC bankruptcy filing that finally came Thursday.

GM said its sales fell 33% compared with a year ago, while Ford's sales for April dropped 32%, equating to 133,979 light vehicles sold in the United States, down from 195,665 a year earlier.

Elsewhere, Textron Inc.'s newly priced 4.5% convertibles extended gains notched on its Thursday debut, trading Friday at 111 versus a share price of $11.25, compared to 110 versus a stock price of $11.00 on Thursday.

Although Mylan Inc. beat expectations on Thursday, there was selling pressure on the shares, and the convertibles, which were quiet Thursday, traded some on Friday at lower levels.

GM erases gains

GM's 6.25% convertibles due 2033, or the GPMs, settled lower by 0.17, or 6%, at 2.14 on Friday in heavy volume after rising 0.46, or 23%, to 2.45 the previous Monday.

GM's 5.25% convertibles due 2032, or the GBMs, fell 0.12, or 5.3%, to 2.14 in decent volume after jumping 0.33, or 17%, to 1.30 on Monday.

GM's 1.5% convertibles due May 31, 2009, or the GRMs, fell 0.21, or 3.4%, at 5.99 after adding 1.54, or 32%, to 6.34 on Monday.

The GM 4.25% convertibles due 2032, or the GXMs, which have only a small amount outstanding due to a recent put, fell 0.3399, or 11%, to 2.65, compared to a 19% surge to 2.85 on Monday.

On Friday, GM reported that its auto sales for April fell 34%, but the company reiterated that sales declines have leveled off.

On Monday, the company announced an offer to exchange 225 common shares for each $1,000 principal amount of outstanding notes.

"The offer is for significantly more than any of these bonds are trading (including accrued interest, the offer would come to more than 11 per bond)," a New York-based sellside analyst said.

But although the pricing is higher than where the bonds currently trade, the deal only gives holders a 10% stake in the company, compared to the United Auto Workers union and the federal government, which would wind up with an 89% stake in GM, for exchanging a combined $20 billion of their debt. Because of the inequity, analysts suspect that the exchange offer will fail.

The exchange will begin only if 90% of bondholders agree to the terms; and if GM fails to get adequate participation, it will file for bankruptcy protection.

Ford convertibles at 74

Ford's 4.25% convertible bonds due 2036 ended the week at 74.2 versus a share price of $5.69, according to a pricing source.

Although the shares fell 4.9% amid weak sales data, the convertibles still look strong relative to where they have been in recent months.

The paper has moved up dramatically from lows in the teens and with a stock price below $2.00.

President Barack Obama announced Thursday the bankruptcy filing of Chrysler.

The Chrysler news caused investors to bid up the other car companies, notably Ford, as it is perceived as the strong player in the Big Three pack.

Mylan weaker

The Mylan 3.75% convertibles due 2015 ended the day Friday at about 110.635 versus a share price of $13.00, according to a pricing source. Earlier Friday, the paper traded at 115.5 versus a share price of $13.25, according to another pricing source.

Shares of the Canonsburg, Pa.-based generic and branded drug maker lost 2% on Friday following a bigger drop on Thursday.

Mylan posted a larger-than-expected profit in the first quarter as revenue rose 13%. The company also raised the low end of its profit forecast for the year.

Barclays Capital research said in a note that at current stock levels they recommended for outright players the Mylan 1.25% bonds for their balanced defensive properties.

For arbitrage players, in their view, the 3.75% bonds or the 6.5% mandatory is better suited for those who seek higher equity exposure.

The 2.9-year 1.25% convertible may be setup on a full hedge to take advantage of volatility in the stock, improving credit, low risk premium of 12%, positive carry of 0.8 points over a year.

The 3.75% bonds have a higher delta and can be setup for their cash flow, potential improvement in credit, and to some extent for their gamma.

The 6.5% mandatories, which were last in the low to mid 800 level, compared to a par of 1,000, can be set up and hedged dynamically to extract the instrument's cash flow given expectation of limited stock upside, the analysts said.

April marks robust month

Year to date, convertibles are still outperforming underlying equities, as well as all major equity indices, with convertibles up 12.4% versus up 9.7% for equities, according to Bank of America-Merrill Lynch convertibles research.

In the corporate bond universe, speculative-grade corporate bonds have outperformed investment-grade names on a total return basis. The high-yield index (J0A0) returned 11.3%, while high-grade index returned 3.1% during the month. Year to date, high-yield issues are up 17.1%, while high-grade issues are up 1.6%.

Meanwhile, Barclays Capital said in a research note that the convert market had notched its best monthly performance in April since the Barclays Capital convertibles index was launched in January 2003.

April's performance was up 9.07%, compared to March's plus 5.65% performance - which was the second best month - and roughly in line with the S&P 500 stock index, which ended April up 9.57%, the Barclays analysts Venu Krishna, Manoj Shivdasani and Peng Cheng wrote.

Year to date, the Barclays convertibles composite index has returned 12.86%, compared to minus 2.49% year to date for the S&P 500.

Convertible preferreds performed the strongest, ending the month up 17.8%, while mandatories were up 8.5%. Bond structures also posted good returns at 7.66%.

Mentioned in this article:

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Mylan Inc. NYSE: MYL

Textron Inc. NYSE: TXT

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