Ford revs up on conversion offers; U.S. Steel lower, in line; Digital River quiet in gray

By Rebecca Melvin

New York, Oct. 26 - Ford Motor Co. moved up Tuesday after the Dearborn, Mich.-based automaker unveiled conversion offers for its two convertible issues due 2016 and 2026 concurrently with its third-quarter earnings announcement.

The Ford convertibles traded slightly over the offer price, which was for conversion plus 19 points in cash to the 2036 holders to convert and conversion plus 21.5 points in cash for the more-recently issued 2016 bonds.

"It was Ford, Ford and more Ford," a New York-based sellsider said regarding convertible market trading action.

Ford's earnings were positive and its move to reduce debt further in an effort to improve its credit standing was seen as part of a larger deleveraging trend among issuers.

Also in the autosphere, Sonic Automotive Inc.'s 5% convertibles due 2029 traded at 110.986 versus a share price of $10.54 after the Charlotte, N.C.-based auto retailer reported a drop in third-quarter net income but had adjusted income from continuing operations that were up slightly. Revenue was also higher on a 4% increase in new-vehicle sales and a 20% increase in used-auto sales.

Sonic is also reducing debt and redeemed $16 million of its 4.25% convertible notes and $20 million of senior straight notes during the quarter.

Group 1 Automotive Inc. had an odd-lot trade of its 2.25% convertibles due 2036 at 86, according to a New York-based sellsider, after the Houston-based automotive products and services retailer also reported higher used-car and new-vehicle sales, up 34% and 13%, respectively.

United States Steel Corp. bonds were lower in line with shares after the Pittsburgh-based steelmaker reported third-quarter earnings that reflected sequential declines in production, shipments and average realized prices, and said that more of the same was expected for the fourth quarter.

Equinix Inc. convertibles were quiet ahead of the Foster City, Calif.-based data center service provider's earnings posted after the close. Those earnings gave rise to a pop in the underlying shares in after-hours trade, and one New York-based sellside analyst said that given the stock drop recently, it is a name to watch subsequent to earnings.

"Given how the stock did earlier, a lot of people are probably watching this. The stock traded up on the back of earnings, and the company also raised guidance," the analyst said.

Digital River Inc. was quiet in the gray market ahead of pricing of its proposed $250 million of five-year convertibles expected after the market close. The deal was seen somewhat cheap.

"It's a couple of percentage points cheap [101 to 104].But there's nothing live out there," a New York-based sellsider trader said Tuesday afternoon.

Ford trades through offer

Ford's 4.25% convertibles due 2016 traded at 176.865 on Tuesday, up 7.4 points outright from 169.4 on Monday.

Ford's 4.25% convertibles due 2036 traded late at 174.6, which was up 6.4 points on the day.

Ford shares closed up 21 cents, or 1.5%, at $14.36 on Tuesday.

Convertible players traded the paper actively at the same time that they debated whether holders would actually take Ford up on its offers.

One sellsider, who said he wasn't sure the Ford paper would get "flushed," added that while he thought it was a fair proposal, he "wouldn't be surprised if [investors] hold out for more."

The 2036 convertible notes were issued in 2006 and the outstanding principal amount is approximately $579 million. Holders who elect to convert the 2036 notes into shares of Ford common stock will receive 108.6957 shares per bond, or the conversion rate, along with an extra cash incentive equal to $190.00, plus accrued and unpaid interest.

The 2016 convertible notes were issued in 2009 and the outstanding principal amount is $2.875 billion. Holders who elect to convert the 2036 notes into shares will receive the conversion rate, which is 107.5269 shares, plus a cash payment equal to $215.00, plus accrued and unpaid interest.

The cash incentive is higher on the newer convertibles, issued in 2009, because that paper has longer call protection equal to two years, so Ford has to pay more to get holders to convert them, trading sources said.

The way the bonds traded after the offer was "slightly, not much over the offered value," a sellside source said.

Will holders convert?

Nevertheless it wasn't a foregone conclusion that holders would convert.

"Ford would like to get rid of these because they want zero debt and an investment-grade rating, but people have been resisting some of these [offers] because they think that they are going to go up. Look what happened to Qwest. They made a conversion offer and nobody took it, so then they had to call them," a New York-based sellside trader said.

The trader was referring to Qwest Communications International Inc., which got only 11.6% acceptance for its tender of its 3.5% convertibles due 2025. But it plans to call the paper in November concurrently with its merger with CenturyLink Inc., formerly CenturyTel Inc.

Ford itself has made two previous offers to holders on the 2036 convertibles, the trader said.

Another New York-based trader speculated that hedge players were likely to convert, while some outright holders "could hang on if they want to maintain an exposure to Ford that gives them income."

The conversion offers will each expire on Nov. 23 at midnight ET.

Ford better than expected

Ford's third-quarter profit was $1.68 billion, or 43 cents per share, compared to $997 million, or 29 cents per share, in the corresponding quarter of 2009.

Excluding items, Ford earned 48 cents a share, which was better than 38 cents expected by analysts.

Revenue was down $1 billion to $29 billion from $30.3 billion in the year-earlier period. But the company said the decline was due to the sale of Volvo Cars this year. Revenue would have been higher if Volvo was factored out of the older quarter.

Performance for the first nine months of the year "clearly exceeded our initial expectations," Ford chief financial officer Lewis Booth said in a statement. "We are now in a period where we are focusing on growing the business profitably around the world following the hard work that has been done last year."

U.S. Steel lower, in line

U.S. Steel's 4% convertibles due 2014 traded at 147.89 late in the session, which was down 3.5 points outright on the day.

Shares of the steelmaker settled down $1.42, or 3.4%, at $40.85. But the shares had traded down intraday by as much as 6.3%.

The convertibles were flat on a hedged basis, a New York-based sellside analyst said, adding that the paper fell "generally, in line with the commodity names, which haven't done that well."

The convertibles trade on an 81% to 82% delta. The delta had been higher when the stock was higher at $60.00. The convertibles had been around double par with the higher delta.

There was a lot of positive outlook on the commodity space based on a second round of quantitative easing in the system. Last week, when the Chinese central bank raised interest rates unexpectedly for both lending and deposit rates in a bid to curb inflation and its asset bubble, there was a short term selloff, a sellside analyst explained.

Since then, there has been a partial recovery and "there is still a positive bias on commodities," the analyst said.

U.S. Steel's revenue was $4.5 billion for its third quarter, which was down 4% sequentially from the second quarter, and it had a loss from operations of $138 million.

U.S. Steel's net loss was $51 million, down $26 million sequentially, but up $252 million from a year earlier. Net income was propped up by currency gains of $139 million.

The company continued to see negative free cash flow of nearly $1 billion, and it provided a somewhat weaker outlook for the industry.

Mentioned in this article:

Digital River Inc. Nasdaq: DRIV

Equinix Inc. Nasdaq: EQIX

Ford Motor Co. NYSE: F

Group 1 Automotive Inc. NYSE: GPI

Sonic Automotive Inc. NYSE: SAH

United States Steel Corp. NYSE: X

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