Ford, GM, oil and gas, airlines down; EDO shows up in the gray; Pantry, C&D, E*Trade deals ahead

By Rebecca Melvin

Princeton, N.J., Nov. 15 - Selling picked up in the convertibles market on Tuesday as redemption fears flared amid weakness in the equity and bond markets, players said.

Tuesday was a deadline for notification of redemptions for year-end, traders said, and rumors were flying regarding the existence of large redemptions even as sizable chunks of convertible bonds were seen for sale.

In the broader markets, equities slumped at about midday after lifting early in the session and as conflicting indications of inflation and consumer spending inspired investors to pocket profits.

Meanwhile, nervousness surrounding the U.S. auto industry hit Ford Motor Co. on Tuesday, leaving its convertible preferreds down 2%. General Motors Corp.'s $25 convertible bonds were slightly lower as its stock slumped again amid continuing bankruptcy fears.

Oil and gas names were also lower as gas prices weakened, and airlines, which generally strengthen in the face of lower energy prices, failed to gain steam to the upside.

In biotechnology names, Medimmune Inc., based in Gaithersburg, Md., was flat to weaker, and drug maker Allergan Inc. saw its 0% convertibles lower after the Irvine, Calif.-based company made a $3.2 billion cash-and-stock offer to buy Inamed Corp., setting up a potential bidding war for the cosmetic surgery product maker that was already in talks with Medicis Pharmaceutical Corp.

Allergan's offer topped the $2.8 billion Medicis cash and stock bid made in March and threw into question whether Inamed would break its agreement to be acquired by the Scottsdale, Ariz.-based pharmaceutical company.

Asked if anything in convertibles was better on Tuesday, a New York-based sellside trader mentioned Advanced Micro Devices Inc. and Cypress Semiconductor but said "that was about it."

Meanwhile the convertible deal calendar was pretty full, with a fourth new deal, albeit a small one, launched early Tuesday by Blue Bell, Pa.-based C&D Technologies Inc., bringing the total number of new deals expected to price Tuesday or Wednesday to four.

But the new deals didn't generate much enthusiasm.

"I think our existing market is doing so poorly that for anyone to buy a new deal - especially on an unknown issuer [to the convertibles market] - the deal both has to look clean and stupid-cheap," a Connecticut-based convertible arbitrage fund manager said. "When I say stupid-cheap, I mean it has to not only model cheap but also look cheap optically."

The buysider went on to say that he didn't think some of the names in line up of new deals fit that description. "Right now I don't think Pantry qualifies even without the SEC investigation. Pantry is not even optionable, always an extremely bad sign for liquidity."

Sanford, N.C.-based The Pantry Inc. launched a $130 million offering of seven-year convertibles on Monday that were seen pricing Wednesday, after the close.

The Rule 144A offering via bookrunner Merrill Lynch was talked with a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

The deal was seen roughly 1% cheap using a credit spread of 400 bps over Treasuries and a 32% volatility, according to a Connecticut-based buyside analyst.

In addition to C&D and The Pantry, EDO Corp., a New York City-based defense contractor, plans to price $175 million of 20-year convertibles Tuesday after the close, and E*Trade Financial Corp, the New York-based online brokerage, was expected to price $450 million of three-year mandatory convertibles on Wednesday after the close.

EDO sees gray market

The $175 million of convertible senior subordinated notes from EDO were seen at fair value at the cheap end of talk by one Connecticut-based sellside trader.

Using a credit spread of 300 basis points over Treasuries and a volatility of 18%, it looked fair value, he said.

The offering was talked to yield 3.5% to 4% for the coupon with an initial conversion premium of 28% to 32%, according to a syndicate source.

A gray market emerged Tuesday for EDO at par, a New York sellsider said.

Citigroup Global Markets is bookrunner for the offering, and Wachovia Capital Markets is joint lead manager.

EDO is also calling for the redemption of all its 5.25% convertibles subordinated notes due 2007, which were seen trading Tuesday near their conversion price of 102.1.

A buysider said that while he hadn't yet taken a close look at EDO, at first glance "I see a couple of liquidity negatives," he said, adding that he was put off by the small trading volumes of the stock. "A $27 stock that often trades under 100,000 shares in New York scares me. Right now, liquidity is everything. New deals are not doing well," he said.

Shares of EDO on Tuesday fell $2.04, or 7.1%, to $26.71.

C&D shares tumble

Shares of EDO fell on Tuesday but not as steeply as C&D, which saw its stock off 17% after the company announced before the session its preliminary financial results for the third quarter and said that it would price $60 million 20-year convertible senior unsecured notes.

The Rule 144A deal via bookrunner Credit Suisse First Boston was talked with a coupon of 4.75% to 5.25% and an initial conversion premium of 21% to 27%, the source said.

It was seen cheap using a credit spread of 500 to 550 bps over Treasury and a 30% volatility, according to a trader.

The notes are non-callable for five years and provisionally callable for two years after that, with puts in years seven, 10 and 15.

Proceeds are expected to be used to repay a portion of its outstanding borrowings under its revolving credit agreement.

Regarding its quarterly results, C&D said unfavorable product mix and higher material costs revenues were to blame for its sequentially lower operating income.

Its net loss was expected to be in the range of $1.7 million to $1.9 million. Excluding special charges the company said it expects operating income to be less than operating income for the second quarter ended July 31.

But it predicted a sequential increase in revenue for its third quarter to $127 million, up about 3% from the second quarter.

Blue Bell, Pa.-based C&D makes systems for the power conversion and storage of electrical power, including industrial batteries and electronics.

Ford, GM ride lower again

The convertible preferred shares of Ford, which haven't moved as dramatically as GM in recent days, acted as if they had to make up for lost time on Tuesday, sliding 2.1%, or 0.60 point, to 28.60, even as its underlying shares lost 1.9%.

The Dearborn, Mich.-based automaker has managed to remain out of the spotlight as GM has suffered several body blows in the last week as growing number of investors expect GM to be forced to seek bankruptcy protection as it faces low sales, rising operating costs and high health care costs.

GM on Monday announced a new round of discounts that will allow anyone in the United States to buy a car at the same price that employees of GM's auto suppliers pay.

Last week, GM disclosed that it plans to restate its earnings. GM said its 2001 earnings were overstated by $300 million to $400 million, but the final amount hasn't been determined. GM plans to issue the restated earnings for 2001 and any subsequent years before it issues its 2005 annual report next year.

But on Tuesday, the 4.5% convertibles of GM were only slightly lower by 0.02 point to 21.95 in heavy volume. Its sister bonds were lower by slightly greater amounts, but trading volumes were lower.

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