Autos retrace gains; oil names lower; Calpine falls on bankruptcy rumor; Interpublic on deck

By Rebecca Melvin

Princeton, N.J., Oct. 18 - Convertible players again traded auto-related paper, with Ford Motor Co. and General Motors Corp. convertibles mostly retracing gains on Tuesday, but GM's 4.5% convertible bonds moved higher before ending flat, sources said.

On Monday, a rally was sparked in GM shares, bonds and credit default swaps after the world's No. 1 automaker said it struck a tentative agreement with its union workers to reduce health care costs and that it was going to try to sell a controlling stake of General Motors Acceptance Corp., its financing arm. Ford bonds moved up on the news as well.

But on Tuesday autos were fading. "Maybe there was some over-optimism about the news that it cut some costs out of health care. It still has to address pension problems and sell more cars," a convertibles desk analyst said.

GMAC credit swaps continued to tighten by about 50 basis points on Tuesday after a dramatic move Monday. It was seen at 270 bps to 290 bps on Tuesday, compared to Thursday when the GMAC CDS were recovering at 500 bps to 515 bps.

GM credit was also tighter, but Ford CDS was about 15 points wider although some speculation circulated in the market that the second-largest U.S. automaker may follow in GM's footsteps with its own financing unit when it reports quarterly earnings on Thursday.

Oil convertible names were in play Tuesday as crude oil, gasoline and natural gas prices eased, traders said. Gasoline, which has been lower for the last 12 out of 14 sessions, dropped Tuesday to its lowest close since July 28. Gasoline is now down 41% from its record close of $2.92 on Aug. 31.

Calpine Corp. bonds "got crunched" and its shares suffered after word that the independent power producer hired law firm Kirkland & Ellis - known for restructuring and bankruptcy litigation - and that sparked rumors the company may be aiming for bankruptcy court.

OMI Corp. bonds were better by 0.125 point to 0.25 point after the shipping company said that it was buying back convertible bonds. Its shares dropped on its 22% drop in third-quarter profit posted Monday.

Another focus of the session was the Interpublic Group of Cos. Inc., which was seen cheap in the gray market at about 102 for its $500 million issue of convertible preferreds, which is expected to price after the close.

Interpublic new preferred issue seen cheap

A New York-based trader said the Interpublic issue was 2% cheap at the aggressive end of price talk, using a credit spread of 500 bps above Libor and 20% volatility.

A second source saw the paper 7.2% cheap at the midpoint of price talk, also using 20% volatility, but assuming a credit spread of 400 bps over Treasuries.

At the cheap end of talk, using the second source's same assumptions, the paper was seen 9.4% cheap, while at the aggressive end it was seen at 4.9% cheap.

Interpublic launched Monday its $500 million perpetual convertible preferred, with price talk putting the dividend at 5.25% to 5.75% and initial conversion premium at 25% to 30%.

The new issue, which is a perpetual preferred, is going to be helpful to the credit of the New York-based advertising agency, but the company has operational issues that no amount of money is going to help, a Connecticut-based buyside source said.

"I would not want to own preferreds in the company," he said. "It's likely to be set up on a cash flow basis and not as a delta trade, and from a hedge perspective it's attractive statistically if the credit deteriorates."

He noted as well that the company would have done a mandatory preferred except that mandatories have to be registered and perpetual preferreds do not, which was attractive given the company's current problems with financial filings with the Securities and Exchange Commission.

Interpublic is one of the many late filers that have given rise to technical defaults from convertible players. But, also like several other cases, holders have been able to negotiate a "cash kiss" from the company in order to forestall the acceleration of the issues, or default in some cases.

In June the company agreed to pay another 12.5 bps of interest to holders of its convertibles who consent to waivers because of the late filing, bringing the total smack so far to 50 bps.

The prospectus for the new Interpublic issue states that failure to file documents with the SEC within 15 days after the required date of filing will result in a 1% annual penalty, until the reports are filed.

GM, Ford bonds remain active

The convertible bonds of Ford and GM remained actively traded on Tuesday, although in the equity market, the shares lost 2% to 3%. From the perspective of convertibles, players didn't see the spinoff of GMAC as terribly important.

Near term the GMAC transaction helps liquidity, but long term it means that they "are going to be out there naked as autosellers, with no financial arm to prop them up," one source said of GM.

In regard to health care costs, players viewed it as only one part of GM's financial problems. The company is targeting $5 billion of structural cost reductions by the end of 2006. GM also has pension problems and also needs to sell more cars and recoup market share.

In the third quarter, GM global automotive operations lost $2.4 billion before taxes, equity income, minority interests and special items, compared with a loss of $759 million last year. Income gains in Europe and Asia/Pacific were offset by lower production volume, unfavorable mix and higher material and health care costs in North America.

Revenue at GM North America declined 5.8% from last year to $24.8 billion, and its operating loss widened to $1.9 billion from $200 million last year. GM's global market share was 14.6% in the quarter, down from 15.4% in the third quarter of last year.

Creditsights said in a report early Tuesday that GM's automotive operations have burned through $6.6 billion of cash so far this year. After accounting for VEBA withdrawals, Fiat Payments, and other operating and non-operating sources and uses, GM's automotive division has used $4 billion of cash this year, ending the quarter with $19 billion of cash and readily available VEBA assets.

Despite losses due to Hurricane Katrina and higher funding costs, GMAC reported third-quarter income before taxes, equity income, and minority interests of $1 billion, up from $935 million last year. Lower income from financing and insurance activity was offset by stronger earnings from residential and commercial mortgages.

The GM 4.5% convertibles closed essentially flat, up 0.03 point, or 0.13%, at 23.67. The other two issues were solidly in negative territory, with the 5.25% bond closing down 0.26, or 1.49%, at 17.14, while the 6.25% paper lost 0.37, 1.89%, at 19.20. GM shares lost 97 cents, or 3.2%, to $29.12.

Ford's 6.50% preferreds lost 0.62, or 1.90%, to close at 32.09, while its underlying shares slumped 19 cents, or 2.19%, to $8.47.

Oil names trade on volatility

The convertibles of Halliburton Co., Schlumberger Inc. and Nabors Industries Ltd. traded mostly in line with their underlying shares, which weakened with energy prices.

Nabors 0% convertibles due 2021 traded at 68.125 and its 0% convertibles due 2023 traded at 105.70 versus a stock price of $63.00. Later in the session, the 0% convertibles due 2023 traded at 100, and Nabors shares closed down 3.69% at $61.80.

Calpine rumor punishes bonds, stock

Calpine's 4.75% convertibles due 2023 lost about 5 points to trade at 48.257, while the 6% convertibles tumbled more than 10 points to trade at 57.4 after the New York Post reported the company has hired restructuring experts Kirkland & Ellis to advise its board. The Post's online edition attributed the story to anonymous lawyers representing parties suing San Jose, Calif.-based Calpine.

Shares of Calpine plunged as much as 20%, but closed off their lows at $2.45, down 38 cents, or 13.4%.

Calpine issued a release Tuesday afternoon to quell those rumors. It confirmed that it was consulting with Kirkland & Ellis but said that the work was focused on Calpine's lawsuit from noteholder trustee Bank of New York Co., as well as other issues.

"While it is not Calpine's policy to respond to market rumors or discuss our outside counsel, we feel compelled to comment today to quell market rumors that may be placing unwarranted pressure on Calpine's equity and bond securities," the company said in its release.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.