GM, Ford trade mixed, but remain market focus; Skyworks holds up after lower guidance; Inco rises

By Rebecca Melvin

Princeton, N.J., Oct. 11 - Mulling scenarios and potential positions, convertibles players remained active in the convertible paper of General Motors Corp., Ford Motor Co. and other auto names, which were mixed for a second day after the mega bankruptcy filing of Delphi Corp., not a convertible issuer itself, sources said.

In other sectors, there was plenty of news among convertible names but the market's focus was narrow. The developments spurred some trades in those names, but players were didn't seem to want to take their eyes away from GM and the auto sector for very long.

"Everyone is still trying to figure out what it means," a New York based sellside trader said.

Semiconductor company Skyworks Solutions Inc. saw its convertibles hold up despite a disappointing earnings pre-announcement that sent its stock down 22%. The Woburn, Mass.-based company was also downgraded by WR Hambrecht.

Meanwhile, rival RF Micro Devices Inc. raised its outlook on better-than-expected market share, and its convertibles were higher. And Cypress Semiconductor Corp. convertibles were lower as its shares contracted 3%.

Inco Ltd. convertibles gained after the Canadian mining company said it planned to buy its rival Falconbridge Ltd., a fellow Canadian company, for $11 billion in cash and stock.

But the convertibles of BearingPoint Inc. remained inactive, according to sources, even as its stock slid 7.3% after the software consulting company gave disappointing guidance and said it didn't expect to be able to file its financial statements for calendar year 2004 by the end of October, as previously anticipated.

The McLean, Va.-based company received a default notice for two of its convertible issues in mid-September for not meeting financial filing deadlines.

There was mild activity in the biotechnology sector, although Advanced Medical Optics Inc. convertibles traded actively right before the close, one trader said, gaining about 0.50 point as its underlying shares slid more than 7% after the medical device maker cut its 2006 outlook, but raised its 2007 revenue guidance. The Santa Ana, Calif.-based company said it plans to accelerate its focus on its core eye surgery products.

Par Pharmaceutical Cos. Inc. bonds were doing a little better as its stock slipped, while Chiron Corp. bonds were a little heavier as its shares pushed slightly into positive territory.

And CSG Systems International Inc., in the headlines Friday for reaching an agreement to sell its Global Software & Services division assets to Comverse Inc. for $251 million, was trading higher as its stock climbed by 5%. Later, shares curbed back down to close just 2.86% higher.

GM, Ford mixed as dust has yet to settle

Trading volume in the convertibles of General Motors and Ford, which was heavy on Monday, was even heavier on Tuesday as the ranks of convertibles players, thinned on Monday due to the Columbus Day holiday, returned to more normal levels on Tuesday.

Trading of GM bonds dwarfed that of Ford, however.

More than seven times the average daily volume of GM's 4.5% convertible bonds changed hands on Monday, with volume pegged at 2.14 million.

The 4.5% bonds lost 0.26, or 1.11%, to 23.19. But this paper, with a put upcoming in March, still remains attractive for investors, a Connecticut buysider said.

But on Tuesday, the $25 GM bond that found more buyers than sellers was the 5.25% paper, which gained 0.04 point, or 0.25%, to 16.11.

GM shares rebounded nearly 4% to $26.42, after a nearly 10% slump on Monday.

The chief risk to GM with the Delphi bankruptcy is its responsibility for up to $11 billion in pension and benefits due to Delphi employees.

Convertibles players were focused on strategies including ones put forward by Deutsche Bank Securities report, which outlined plays based on the idea that GM will sell off equity in General Motors Acceptance Corp., which has a higher credit rating than GM itself.

For its part, CreditSights said in a research report that GMAC "may need to be stirring toward the next round of structural tweaking to defend its earnings base."

The research firm said that "cryptic" rating agency comments leave a sense that more may be afoot sooner rather than later.

Standard & Poor's moved GM lower and Moody's put GM and GMAC on watch for potential downgrades on Monday.

CreditSights also said that GMAC still has abundant options around funding structures and discretionary balance sheet management and upstreaming.

"If the goal of any new structural shift is to push the cash flows and liquidity pools and high quality portfolios of GMAC away from the parent's potential grasp (and possibly the grasp of the UAW if they go to war later to asset their OPEB claims from Delphi or GM), then the structural changes would be good for GMAC ratings, but very bad for GM-the-parent's base of financial support," CreditSights analyst Glenn Reynolds wrote in the report.

While all things auto was the focus of the day, news on the tape and big stock moves in several convertible names forced convertibles players to jump into the ring in other issues as well.

Skyworks holds up despite outlook

The 4.75% convertibles of Skyworks traded at 98.50 versus a stock price of $5.30 after the integrated circuit maker said after the close Monday that its fourth-quarter revenue would be about $190 million, well below the low end of $194 million that was provided as guidance in July.

Skyworks said the revised outlook was due to a one-time payment to a customer recorded against current period revenue and a late-quarter demand shift.

But the Skyworks convertibles held up well, one New York-based trader said, as the bonds "are callable in a month and are looked at as a refinancing story."

The 4.75s traded at around 101 prior to the reduced outlook news, when its stock price was about 22% higher at $6.75, according to a New York-based trading source.

Cypress Semiconductor saw its convertibles trade at 107.50 versus a stock price of $12.75. On Monday the Cypress paper was at 109.50, versus a stock price of $13.25.

Inco rises on acquisition

The three convertibles issues of Inco more or less followed their underlying equity on Tuesday, which was mostly higher, after the company announced that it was buying a rival that would provide better diversification better economies of scales for the mining company.

The purchase pulls Inco's production profile slightly away from nickel, down to 50% from 60%, and beefs up copper to 33% of production, with aluminum accounting for 10% and the balance provided by cobalt. The diversification reduces risk for the company.

Of the three convertible issues, Inco's 1% convertible due 2023 were seen as the "most balanced" and actively traded, trading at 144 early in the session when the stock was at its highs, and later in the day at 140. The 3.5% convertible were also traded at 170 versus a stock price of $43.50. Inco shares ended up 94 cents, or 2.19%, at $43.77.

BearingPoint, RealNetworks quiet after news

Neither BearingPoint's 2.75% series A convertibles nor its 3% series B convertibles were seen trading Tuesday, traders said. But they were indicated lower after the company said that it doesn't expect to be able to file its financial statements for calendar year 2004 by the end of October and as well the company's updated outlook was disappointing. It forecast gross revenue of $3.5 billion to $3.7 billion for fiscal 2006, and sees operating income of $180 million to $250 million for the year with net revenue of between $2.7 billion and $2.85 billion.

The 0% convertibles of RealNetworks weren't seen trading either after the company and Microsoft Corp. announced around noon that a longstanding legal suit against the software giant was settled for $761 million.

Shares of RealNetworks surged $1.96, or 34%, to $7.70 after the news.

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