United Industrial hits 106.5; Goodyear dips, then recovers; Ford slips; Massey off again

By Ronda Fears

Nashville, Sept. 10 - Goodyear Tire & Rubber Co.'s convertible initially skidded lower with the stock as the Akron, Ohio, tire maker announced about 340 layoffs but recovered to end slightly higher by the end of the session.

"Initially, there was a knee-jerk reaction [to the Goodyear layoffs] because it was perceived as bad news, but really this was in the works and had been expected," said a sellside convertible trader, referring to Goodyear's restructuring plan launched last year.

Delta Air Lines Inc.'s announced layoffs - about 6,000 to 7,000 - and other restructuring details from earlier this week have done nothing but pressure its convertibles, along with the underlying stock, as US Airways Group Inc.'s speculated return trip to bankruptcy overshadows Delta's efforts to avoid bankruptcy.

Delta's convertibles on Friday lost another 1 to 1.25 points with the 8% issue at 34.5 bid, 35.5 offered and 2.875% issue at 36.25 bid, 38.25 offered, a sellside trader said. The stock dropped another dime, or 2.55%, to $3.82. Delta's straight junk bonds fell as much as 4 points with the 8.3s due 2029s at 24.5.

Massey Energy Co.'s convertibles lost another 2 to 3.5 points, too, following its earnings warning, which prompted a downgrade in the coal mining stock Friday by Friedman Billings Ramsey equity analysts. Massey's 2.25% convertible was at 111.75 bid, 113.75 offered and the 4.75% issue at 168.5 bid, 170 offered. Arch Coal Inc. was lower in sympathy.

Related to the earnings warning of auto parts suppliers Visteon Corp., Ford Motor Co. - former parent to Visteon - slid, as well, with the Ford convertible off by a quarter-point amid heavy trading and Ford shares down by 1.5%. General Motors Corp.'s convertibles were off, too, but just slightly and with very low volume.

While there were several high-profile losers Friday, traders said the convertible market in fact was rather well bid.

One sellside trader noted that the busted convertible universe is on the rise again after falling sharply last year and during first quarter on the heels of an historically high percentage of the fixed-income type converts. That, the trader remarked, has brought many crossover fixed-income fund managers back into the convertible world of bonds.

Demand for new paper is raging, as well, with the dearth of new issues going back into the summer. Thus, United Industrial Corp.'s small new deal shot up out of the chute, after pricing aggressively, and ended the day at 106.5 bid. Before pricing, bids were as high as 2.5 points over issue price before easing back to a bid of 2 points over as indicative terms were tightened.

Lucent Technologies Inc. also was a noteworthy gainer Friday. There was considerable short-covering in the stock, a buyside trader said, as well as buyers for the convertibles, situations that were amplified on an upgrade to the credit by Moody's.

United Industrial goes to 106.5

United Industrial priced its 20-year senior unsecured convertible notes at the tightest end of revised price talk and then still shot up 6.5 points from par and gained around 4 points from where the issue was trading in the gray market before pricing.

The aerospace and defense company sold the $100 million issue at par to yield 3.75% with a 37% initial conversion premium - at the aggressive end of yield talk for a coupon of 3.75% to 4.25% and at the aggressive end of revised premium guidance of 35% to 37%, which was originally 27.5% to 32.5%.

United Industrial shares shot up $2.07, or 7.23%, to $30.71 following the pricing.

Goodyear dips 5/8, ends up ¼

On Goodyear's layoff news announced early Friday, the 4% convertible notes first dipped lower by 0.625 point as the stock lost ground. But as the day wore on and investors reminded themselves of the tire maker's story, traders said the issue rebounded and closed the day slightly higher.

The 4% issue ended at 123 bid, 123.125 offered, up by about a quarter-point. The underlying stock closed up 2 cents, or 0.17%, to $11.54.

Goodyear announced 340 layoffs in its engineered products and chemicals units to be made by the end of third quarter, with an associated $29 million to $33.5 million in charges. In the engineered products unit, the reduction in force amounts to 3.4% of that group, and in the chemicals unit, 8.3%.

"This was expected, not just anticipated," a sellside trader said. "Remember, the convertible was mandated by Goodyear's union negotiations last year."

A convertible offering was part of Goodyear's agreement with union workers late in 2003, but the deal announced was delayed by a Securities and Exchange Commission investigation into the company's accounting practices. The 4% issue priced in late June. If Goodyear had not followed through with its agreement to make an equity-like offering, then its union workers could have rescinded the latest contract.

Ford slammed down ¼ point

Ford's 6.5% convertible traded heavily along with the underlying stock as Visteon, the second largest U.S. auto parts supplier that was spun off from Ford in 2000, warned that production cuts at Ford and rising steel prices as well as fuel prices, would hurt results. On Visteon's warning, Fitch Ratings cut that credit to junk.

"Things are just not looking good for Ford lately, the economy has not bounced back much if you look at their business," said a buyside trader. "Now, the Fed is probably going to raise interest rates again pretty soon, and there's the [U.S. presidential] election coming up, so really whatever, if any, economy recovery was in motion has been put on hold."

The Ford convertible closed down 0.25 point to 52.875 bid, 53.375 offered, the trader said. The issue ended on the New York Stock Exchange off by 0.29 point to 53.05.

Ford shares closed down by 21 cents, or 1.48%, to $13.96.

Lucent issues up 1.5-2 points

Lucent was up again Friday, a buyside trader said, after heading north for most of the week. But the gains were "glorified" Friday, he said, after Moody's upgraded the credit. There had already been some rather severe short-covering in the stock, which was magnified by the Moody's news, he added.

Moody's raised Lucent's senior unsecured rating to B2 from Caa1, subordinated rating to Caa1 from Caa3, and trust preferreds to Caa1 from Caa3.

Lucent's 2.75% convertibles, which are very liquid, came into a new "radar range" among investors by climbing into the B rating category, even though the issues are still junk paper, the trader said.

"There are some fund managers that just won't touch something with a C rating," he said. "Even though risk is still pretty high in the single-B area, it's not quite too treacherous."

Moody's said the upgrade reflects a stabilizing revenue base and Lucent's progress in improving profitability and cash flow. Plus, Moody's said Lucent's liquidity should be sufficient to fund operations intermediately.

Lucent's 2023 convertible gained 1.5 points to 127.625 bid, 127.875 offered, and the 2025 convertible rose to 133.25 bid, 133.5 offered. Lucent shares ended up by 7 cents, or 2.17%, to $3.30. Lucent's straight junk bonds firmed, too, on the upgrade with the 6.45s due 2029 seen up 0.75 point to 79.75.

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