GM lower, but selling lets up; Ford edges up; CNet merger noise resurfaces; Williams, Aquila rise

By Ronda Fears

Nashville, April 18 - There was a reprieve, or at least a respite, from selling in the convertible market Monday as players largely stood on the sidelines ahead of a string of prominent earnings reports due this week. Early in the day there was some expectation that price talk would emerge on Lazard Ltd.'s convertible that is pricing alongside the initial public offering, but that never surfaced.

Lazard aims to fetch about $2 billion with the IPO, a $250 million mandatory convertible and note sales. The stock guidance is for a price range of $25 to $27 a share.

With nothing firmly on the new issue calendar, most of the market's attention was tuned into earnings. Two that are closely eyed as they together have nearly $15 billion of convertibles in play are General Motors Corp. and Ford Motor Co. The two moved in bi-polar fashion Monday with GM shares up and the convertibles still on the slide, while Ford stock dipped and its convertibles edged slightly higher.

GM's converts were off by 0.125 to 0.5 point while the stock regained 59 cents, or 2.3%, to $26.19. Ford's 6.5% convertible added 0.10 point to 37.5 as the stock slipped by 16 cents, or 1.68%, to $9.34.

Elsewhere, a sellside analyst observed a "big flight to quality/low premium names," which are few and far between.

"In general, everyone is miserable," she added, also mentioning heavy liquidations in the convertible market, as many have in the past couple of weeks.

While no merger news specifically affecting the convertible market was announced Monday, news of delays in financial reports from Saks Inc. and Toys "R" Us Inc. from last week put some pressure on those convertibles. On Monday, Standard & Poor's cut Saks ratings to B+ from BB and left the credit on watch with a revision to developing from negative.

A desk analyst at one sellside shop said it did not appear that the delays would necessarily nix mergers or splits - pending for Toys "R" Us and still in the works for Saks - but the uncertainty about accounting matters was a drag on both issues.

Saks delay could cause default

Saks's convertible has been hit repeatedly since chatter emerged about a month ago that the company was shopping its department store group for a split from the upscale Saks Fifth Avenue stores, which has pushed the stock up more than 25% since then and thereby put a squeeze on hedged convertible holders.

Whether the Saks convert will be tilted into default by noteholders is another negative wildcard.

S&P analysts said the delay its 10-K filing would throw Saks out of compliance on its $990 million of senior notes, $230 million of senior convertible notes and $800 million secured bank facility. Thus, unless holders of a majority of each series of notes waive compliance with the filing requirements, S&P said holders of at least 25% of any such series would have the right to accelerate maturity of those notes, plus each indenture contains cross acceleration provisions. Saks has said that if it receives notice of default, it will seek waivers.

Saks' bank lenders reportedly have already waived any event of default.

The disturbance, too, could result in Saks' vendors restricting or eliminating customary trade credit terms, S&P said, or they could require Saks to pay cash or secure letters of credit for merchandise orders. Ultimately, that could have an adverse affect on liquidity, although S&P said a series of adverse events would have to take place before the company would be in financial distress.

CNET convertibles up 0.25 point

CNet Networks Inc. doesn't have a deal yet, but there were reports Monday that the company had confirmed it was in talks with Google Inc. and Yahoo! Inc. regarding a possible merger. Buzz about a merger with Yahoo! at least has circulated before, so the news didn't move CNet's securities by any great measure.

The CNet 0.75% convertible was quoted up a quarter-point to 93 bid, 94 offered, but no live market was seen in the issue. Similarly, the underlying stock gained just a nickel on the day, or 0.53%, to $9.52.

Holders of the CNet convertible like the idea of the online advertising and news concern joining up with the likes of Yahoo, however.

"Whether it happens now or ever, I obviously have no idea, but at some point, I think a merger with YHOO makes a lot of sense for them both," said one CNet convertible holder.

"YHOO wants more valuable content for its distribution, and YHOO would provide CNET with a lot more distribution and ad-selling strength. It also adds a shopping component that I think would be an added bonus for YHOO with CNET's "MySimon.com" comparison shopping service. Also, it would be a small bite for YHOO to do."

Yahoo! also has convertibles in play, which are deep in the money. The 0% issue was flat Monday ahead of the company's earnings report on Tuesday. Yahoo! shares ticked up 9 cents, or 0.28%, to $32.55.

Hedge funds target Williams

Energy names are largely out of favor among convertible players lately, shedding more risky credits like Calpine Corp. and the like, but there were a couple of issues mentioned Monday in the context of hedge funds putting on the paper. One was Williams Cos. Inc., which has had its share of rough times, too, but seems to have been on the mend in the more recent past.

"Commodity trading among the hedge funds has gotten a lot of ink recently, but what I'm seeing today is the hedge funds starting to load up on some of the energy credits and we've not seen a lot of that," said a sellside analyst at one of the smaller boutiques in New York.

"It's sort of a hot, new strategy and we're seeing some activity but I wouldn't say its some gigantic trend or that there is a ton of money getting poured into this. Let's face it, more hedge funds are pulling out [of convertibles] than anything else."

He specifically mentioned Williams' 5.5 convertible, putting it up about 2 points Monday to 84.5 bid, 85 offered, adding that the issue trades on about an 85% hedge. Williams shares gained 55 cents, or 3.32%, to close at $17.10 on Monday.

"I am thinking growth, earnings and more debt reduction are on the immediate horizon for Williams," said one convertible holder. "Later, issues will be things like dividends and, of course, the price of oil and gas will have its effect but that comes and goes with the wind of Wall Street. Because of those latter items, there is maybe some opportunity in volatility."

Williams is due to report earnings May 5.

Aquila cautiously ticks up

Aquila Inc. was another name cited in this vein, but with buying interest on a much smaller scale because its convertible is a mandatory. But, the buysider added that from an arbitrage standpoint a lot of the interest is related to the volatility in the stock.

On Monday, the Aquila 6.75% mandatory edged up about 0.125 point to 32.125 with "modest" interest, the buysider said. Aquila shares gained 2 cents on the day to $3.42.

The buysider also said there was some upbeat news from Aquila management last week during roadshow presentations with investment managers on the East Coast. From his notes, he said some of the more interesting tidbits included remarks about the company's plans to invest $650 million in the next 10 years for utilities not put up for sale.

"The requirement to fund this is driving an asset sale. If $650 million can be reached with selling only a partial set of the listed properties, it will probably be done. They are trying to complete all asset sales by the end of 2006 and reported a lot of initial interest," he said. "They also could use debt and stock to fund $650 million in these upgrades."

He added that there was some discussion at the Aquila roadshow about the company asking stockholders for a reverse split in 2006 or 2007, along the order of 1 for 4 or 1 for 5, depending on the stock price at that time.

Merrill's hedge index off 5%

As one measure of pain for hedge funds, and there are many, Merrill Lynch reported Monday that its convertible hedge index to date is off 4.84% on a net basis before hedging out interest rates, or 4.5% afterward.

Merrill convertible analyst Tatyana Hube said that higher yields and volatility made positive contributions to the hedge index return last week, somewhat mitigating the negative effect of wider spreads. She noted that high-yield spreads last week expanded sharply to 375 basis points from 341 bps.

For the most part, though, Merrill remains bullish on bonds, she pointed out. In the most recent market economist report, Hube said, Merrill Lynch's economics group commented that "the secular bull market in bonds cannot be over."

Citing the economics report, she said, "Secular bull markets only end when the general public embraces the security or asset in question. This happened with tech, commercial real estate, housing, emerging markets, gold, oil and industrial commodities during their prior mania phases."

Additionally, she noted that the economists highlighted GDP output gap as a hot topic, remarking that "due to downward revision to their economic forecast, the GDP output gap is now even wider than they previously forecast, which provides support to their call that the Fed will stop its current tightening campaign sooner than most expect."

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