GM credit blowout overshadows bounce in stock; Ford's convertible also still skidding; Lazard emerges

By Ronda Fears

Nashville, March 21 - General Motors Corp. remained the road hog in terms of convertible flow Monday, with traders reporting continued heavy selling in the 4.5% and 5.25% issues but buying in the 6.25% issue even as the underlying stock regained some lost ground on short covering.

"What you're seeing is a lot of hedge funds getting in [the 6.25% convertible] because there's still a gigantic negative overhang on the stock," said a sellside trader. "There are still some outrights involved and others; there are $8 billion of these things."

Countering the nearly 4% gain in GM shares, he said, was the fact that GM credit continued to widen Monday after last week blowing out a whopping 100 to 125 basis points on the looming possibility that its debt ratings might be reduced to junk following the Big Three automaker's warning of a loss for first quarter and a sharply reduced outlook for 2005 results.

Lehman Brothers Inc. head of U.S. convertible research Venu Krishna pointed out Monday that the convertible research team's work on the GM convertibles last week was not a recommendation but just an analysis of the various ways to play those three convertibles.

Krishna and Lehman equity analyst Darren Kimball along with Lehman's European auto credit analyst, Mark Wade, are hosting a conference call on GM for clients of the firm at 11 a.m. Tuesday.

Lazard convertible now a go

After market buzz had all but died out, French investment banking house Lazard LLC - the privately held partnership run by Bruce Wasserstein - on Monday tacked on a $287.5 million mandatory convertible to its initial public offering estimated at $850 million.

Since last fall when rumblings of the Lazard IPO surfaced, there had been market chatter that a convertible would be part of the going-public process, but in mid-December the talk was silenced when the IPO registration made no mention of a convertible.

The registration statement filed with the U.S. Securities and Exchange Commission also made mention of a $150 million private placement to a third party consisting of equity units with terms identical to the $287.5 million offering, part of a $200 million capital investment from French bank Ixis in the form of a security exchangeable into common stock.

Lazard's IPO ends a long-running feud between Wasserstein and other partnership owners in the firm, as Wasserstein plans to use proceeds to buy out the 36% stake in the firm owned by Lazard chairman Michel David-Weill and his allies. In October, David-Weill had demanded that Wasserstein pay him and allies $1.62 billion in cash for their controlling stake by the end of 2005 or resign.

Air Canada parent plans deal

Air Canada parent ACE Aviation Holdings Inc. said Monday it plans to sell C$250 million of 30-year convertible senior notes plus C$350 million of stock to refinance the C$540 million credit facility from GE Capital Corp. used as bankruptcy exit financing last September. No further details related to offering terms were available, however.

Convertible players were still looking for terms on the Chiquita International Brands Inc. $75 million perpetual convertible preferred deal that is part of its financing package to fund the $855 million acquisition of the Fresh Express produce segment of Performance Food Group Co. The company has a bank meeting Wednesday, and market sources are expecting pricing guidance to emerge on the convertible offering beforehand.

Meanwhile, the only firm deal slated for the week is PNM Resources Inc.'s $215 million mandatory, which is talked with a dividend of 6.5% to 7.0% and initial conversion premium between 18% and 22%. That is for Wednesday's business, concurrently with 3.4 million shares of common stock, with proceeds earmarked in part to retire debt assumed in its $1.024 billion acquisition of TNP Enterprises.

PNM Resources shares closed Monday off 34 cents, or 1.23%, at $27.20.

Market still rides GM story

GM continued to roil the convertible market and was a big factor in the credit markets overall, traders said.

"The blowout in that [GM] credit was virtually unsurpassed" last week, one buyside trader said. "It was a big, big deal."

Five-year credit default swaps for GM widened by 124 bps last week and its 7.125% straight bonds due 2010 widened by 115 bps, according to Merrill Lynch.

Analyst reports Monday credited the GM story to a more pronounced widening in the junk bond market than high-grade bonds, compounded by the back up in Treasury yields. By some accounts, junk bond spreads widened as much as 25 bps last week.

Still, there's not much room for a push in corporates, as Merrill Lynch strategists said the high-grade market (excluding autos) is trading at 34 bps over Libor and has a six-year duration.

"Economically that means the general level of spreads can widen a mere 3 bps over the next six months before underperforming swaps," the Merrill analysts estimated. But they added, "Near term all indicators point to robust product demand and real money investors were reportedly buying in the past couple of trading sessions. Still, the group will likely take their credit allocation to an underweight should spreads recover."

GM issues pressure Ford

GM's busted 4.5% convertible dropped 0.34 point to 23.5 and the 5.25% issue lost 0.24 point to 18.9 Monday, both on heavy selling volume. Conversely, the 6.25% issue saw heavy buying volume and gained 0.27 point to 21.67. All the while, GM shares rose $1.07 on the day, or 3.74%, to close at $29.69.

"There was a little bounce in the [GM} stock to cover short position, but there's nowhere for this to go but down, especially if they cut the dividend, which a lot of people think they will be forced to do," said a buyside trader. "It's amazing how this event has just devastated the market."

Ford Motor Co. continued to be a casualty in the convertible market, reacting similarly to GM on Monday, with the convert losing despite a bounce in the stock. Ford's 6.5% convertible preferred dropped 0.24 point to 46.64 but traders also noted that flow in that issues died down a bit. Ford shares on Monday added back 12 cents, or 1.05%, to end at $11.51.

CenterPoint 2.875s bid up

CenterPoint Energy Inc. stock was getting a plug from credit analysts on Monday, saying the stock should catch up this year with the nice performance of the energy firm's bonds last year. A convertible trader said there was some buying in the CenterPoint 2.875% convertible, but he said it probably didn't have anything to do with the credit report. In addition, he didn't see any activity in the CenterPoint 3.75% convertible.

Meanwhile, CenterPoint shares on Monday slipped by 9 cents, or 0.73%, to close at $12.18.

"We did some of the 2 7/8s at 107 to 107 1/8 versus $12.25 on the stock, and that's up from about 106 3/8 on Friday, bidside," the trader said. "I saw nothing on the 3.75s."

Anther sellside trader pegged the CenterPoint 3.75% convertible at 116.75, unchanged from Friday.

Analysts at Credit Sights said in a report Monday they thought CenterPoint shares had not caught up with the performance of the company's bonds last year, tightening as much as 100 bps or more, so the stock seems poised for some strong upside in 2005. CreditSights has an overweight recommendation on the stock and bonds, and noted a lacking in coverage on the equity by big Wall Street sellside shops.

"CenterPoint Energy (Ba2/BBB-) is currently in the late stages of one of the most complex restructurings in the utility sector and we believe the ultimate outcome is not being correctly valued in the equity markets," the CreditSights analysts said in the report.

"After another transition year in 2005, we see CNP emerging as a highly regulated utility with a small pipeline operation that has no commodity price exposure and very predictable earnings and cash flow streams. Importantly, we do not believe Wall Street has followed the complex restructuring very well on equity side."

There has been some weakness in CenterPoint bonds recently, the analysts pointed out, but added "we still see further upside for the bonds, and we especially see more upside for CNP shares."

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