GM's warning causes pile-up with Ford, Goodyear, Titan slammed; JetBlue, airlines drop on oil surge

By Ronda Fears

Nashville, March 16 - General Motors Corp.'s warning that earnings would fall far short of Wall Street's expectations sent a shockwave through the markets, with convertibles being no exception. Not only did Fort Motor Co. track GM sharply lower but related names like Goodyear Tire & Rubber Co. and Titan International Inc. fell as well as other big cap names like Tyco International Ltd. and Eastman Kodak Co.

"There was a massive exodus in GM. There also was a big sell-off in Ford," one dealer said. "Remember, a lot of retail accounts and equity funds are involved in those converts. They were hammered today. The hedge guys weren't hurt that bad, because their bets have been counting on there being a lot of downside here."

Generally speaking, a hedge fund trader said the convertible arbitrage community was "sadistically gleeful" about the downturn in the markets, "as the bet is pricing in 10% to 15% of downside" in stock prices.

Psychologically, though, the tone of the markets continued to deteriorate as oil futures set a new record Tuesday with the April contract spiking up $1.61 to $56.46 a barrel on the New York Mercantile Exchange, passing the previous record of $55.17 hit last October.

Airlines were hit again by the surge in oil, with JetBlue Airways Corp.'s newest convertible taking one of the hardest blows. Anxiety about recovery rates is weighing on the airline sector, too, as bankruptcy concerns become more prevalent with Delta Air Lines Inc. recently reminding the markets that it is not out of the woods yet.

JetBlue's new 3.75% convertible dropped 2.25 points to 96.75 bid, 97.25 offered. Pinnacle Airlines Corp. was another big decliner, with its new 32.5% convertible off about 2.5 points to 92.5 bid, 93.5 offered. Delta's converts were off a quarter-point to a half-point, while AMR Corp.'s weakened similarly.

Connetics brings St. Pat's deal

For Thursday's business, Connetics Corp. is pitching $125 million of 10-year convertible notes talked to yield 1.5% to 2.0% with a 32.5% to 37.5% initial conversion premium, to be sold on swap with $35 million of proceeds earmarked to buy back stock from short sellers participating in the deal.

The Palo Alto, Calif.-based specialty biotech firm, which develops treatments for dermatological therapeutics, did not specify the use of proceeds, but market sources pointed out that its $90 million 2.25% convertible becomes callable this coming May with a 140% hurdle.

Connetics' 2.25% convertible due 2008 is deep in the money, trading roughly 10 points over parity, a sellside trader said, who quoted the issue off 2.5 points Wednesday. Connetics stock closed down 67 cents, or 2.42%, to close at $27.07.

Toys, Central Parking move up

Autos and airlines overshadowed several nice gains elsewhere on Wednesday, though.

Central Parking Corp. continued to trade up, with heavy buying moving the 5.25% convertible trust preferreds up 1 point to 21.25 while the stock gained another 2.4% to $16.70. The movement came a day after the Nashville-based parking facility management firm said it had hired Morgan Stanley & Co. Inc. to explore "strategic alternatives."

Toys "R" Us Inc.'s mandatory shot up sharply on heavy buying, traders said, on reports that after reviewing offers solicited in its split of the toy unit and Babies "R" Us division seems to point to a leveraged buyout winning.

The Toys "R" Us 6.25% convertible climbed 1.5 points to 59 on the chatter, with the stock up 68 cents, or 2.82%, to $24.77. Yet, sources told Prospect News that the Toys "R" Us junk bonds dropped about 2.5 points to the 86 neighborhood.

Viacom split uneasy for credit

Viacom Inc. was another gainer Wednesday but the converts were a mere shadow of the sharp rise in the stock, which soared more than 6% after the entertainment giant announced that it is considering splitting its broadcast group from its cable properties. Viacom's news, on the heels of a split-up at Liberty Media Corp. that pushed its credit down into junk territory, was cause for hesitation in regard to the credit, a buyside trader said.

The Liberty Media 3.25% notes exchangeable into Viacom shares gained 0.375 point to 87.5 bid, 88 offered, while Viacom shares rose $2.13, or 6.3%, to $36.00.

"Everyone was focused on the stock, any play there," he said. "As for the converts, if anything initially, I'd expect there would be some selling pressure, just because of the uncertainty - on the credit side, no one knows all the repercussions yet to the Liberty split and on the stock side, no one knows what the issue will be convertible into."

Standard & Poor's put Viacom's ratings on negative watch on the news, saying the potential split "represents a strategic reversal that began with management's reconsideration of the company's commitment to the A- credit rating." Still unclear is how the debt burden of $9.7 billion as of Sept. 30 will be allocated among the two companies and the extent to which debt issue provisions could hamper restructuring, S&P said.

Liberty Media on Tuesday announced a spinoff of its stakes of Discovery Communications and Ascent Media Group, which also was perceived as a positive for stockholders but detrimental to bondholders as S&P and Fitch Ratings both cut the credit to junk on the news.

"Basically the credit view is that Liberty Media will be left with fewer assets generating cash flow to service debt," the trader said. "With Viacom, it comes down to a change in what the issue converts into. That will be a matter of contention in the whole process."

The Viacom news, however, coupled with downcast views on the automotive industry caused Sirius Satellite Radio Inc. to soften a bit, as speculation that Sirius might be a merger target for Viacom, especially after hiring former Viacom executive Mel Karmazin to be its new CEO.

GM issues ditched on warning

GM lopped its 2005 earnings outlook by more than half on Wednesday, which prompted S&P to change the automaker's outlook to negative and Moody's to put the credit on review for possible downgrade. Fitch cut its debt issues to one notch above junk territory, with a negative outlook.

On very heavy selling, the GM 6.25% convertible - a $25 par bond - dropped 2 points to 21.875, a dealer said, while the 5.25% convertible - also a $25 par bond - fell 1.25 points to 19. GM shares plunged $4.71, or 14%, to $29.01.

Citing weak North American sales and rising health care costs, GM reversed its earlier forecast for 2005 to show breakeven results to slight profits. More to the point, as the sellside trader put it, GM is now saying that automotive operations will consume nearly $2 billion in cash versus contributing $2 billion in automotive to cash flows, as was previously expected.

S&P credit analyst Scott Sprinzen said GM's ratings are "tenuous" but "can tolerate several quarters of weak profitability and cash flow, but only under the assumption that financial performance improves to more satisfactory levels thereafter."

"The question becomes how low can you go? We believe earnings estimates will continue to be revised lower throughout 2005, and breakeven results for the year is probably a good place to start," said CreditSights analysts Michael Ward and Glenn Reynolds in a report Wednesday. "GM's stock price is down more than 10%, but we believe negative news flow will keep the bottom feeders away, suggesting more to go."

A GM bondholder said he expects GM will consider cutting its common stock dividend, which he speculated could save the company over $1 billion annually if done away with altogether. Cutting the dividend to zero, he said, may be "a move that must be made to avoid a downgrade. I only own the bonds, but the equity holders must suffer a bit and so should the labor. Medical and pension costs must be controlled, period."

Ford, Goodyear, Titan follow

The news was a drag for peers and suppliers. "The whole auto industry, suppliers, everybody is warning," one buyside trader commented. "They were all smacked today. I guess you'd call it guilt by association."

S&P plainly said that despite common dynamics at Ford, from a credit standpoint it was in better shape than GM - and no credit actions were taken against Ford by any of the ratings agencies - but Ford was punished nonetheless.

Ford's 6.5% convertible trust preferred dropped 1 to 1.25 points to 47.5 with the stock off 33 cents, or 2.7%, to $11.90.

Goodyear was hit hard, too, although on Wednesday the Akron, Ohio-based tiremaker reported its first annual profit in five years. Traders remarked that Goodyear's convertibles bounced around quite a bit during the session, with notable buyers on the weakness. The Goodyear 4% convertible ended the day down by 4 points at 135 bid, 136 offered while the stock closed off 46 cents, or 3.16%, at $14.04.

Titan, which makes wheels and mounted tires, was another victim. Its 5.25% convertible due 2009 dropped 2 points to 131.5 bid, 132.25 offered, as the underlying stock dropped 36 cents, or 2.5%, to $14.19. Titan is in the process of buying Goodyear's North American farm tire business for about $100 million.

Oil prices are another major factor, one buyside trader pointed out, not only because they can impact auto sales but tire production. "It takes a lot of oil to produce tires," he said. "Margins are severely squeezed, demand is being hurt by competition, and the slowdown in car markets doesn't help."

Rebels brace for bumpy ride

Contrarians buying against the tide of selling in GM, Ford, Goodyear and the like said they were braced for a tumultuous ride. Moreover, one GM convert buyer said he expects more downside in the immediate future but expects drastic measures will eventually result in a turnaround.

"I cautiously bought [GM] more today but I'm keeping some back in case there's more buying opportunities," he said. "What I look for in the [first quarter] earnings report is that GM still sucks, but not nearly as bad as Ford when it was being ran by Pinky and the Brain (trying to take over the world one day at a time)."

As for Goodyear, he said, the hysteria was fixated on GM and oil prices.

"Number One, GT has moved significantly away from new car tire sales. They are still affected, but to a lesser degree than before," the hedge fund manager said. "Number Two, speculators and the cheap dollar are causing these oil spikes. A cheap dollar actually helps GT as their overseas profits are repatriated. And my prediction, take it for what it's worth, is that oil will moderate in the coming months as the world economy begins to slow. Where does that leave GT? Right now, at bargain levels."

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