GM results send convertibles sliding; Ford rides along; Manpower zeros seen rising; airlines 'deathly' quiet

By Ronda Fears

Nashville, April 19 - Sellers continued to dominate the convertible market Tuesday but trading flow also remained light. As one sellside trader put it, "All the bids that had been on the table have already been hit; there are no bids out there."

Traffic in General Motors Corp. was even light Tuesday as the auto titan reported a $1.1 billion first-quarter net loss, which actually was a bit better than expected by some analysts.

Ford Motor Co.'s convertible was lower, too, ahead of its earnings due before Wednesday's open.

Several airlines are due to report earnings this week, too. But, again no activity was reported in those names, including Delta Air Lines Inc. One sellside trader said the converts were marked down Tuesday by a half-point to 1 point, but he added he had "not traded anything" as everyone is "scared of earnings this week." Delta reports earnings Thursday. On Tuesday, the stock added 3 cents to $3.88.

Mounting losses for convertible arbitrageurs weighed heavily on the market, and traders said liquidations continued to depress overall moods.

"Just on Monday lots of the hedge guys in converts lost upwards of 50 basis points and the group as a whole appears to be off somewhere around 525 bps," said a sellside trader.

She pointed out that those estimates would make Merrill Lynch's convertible hedge index, reported on Monday down just shy of 5%, appear rather modest.

A desk analyst on the sellside said Tuesday was "more of the same, not too much activity." He said there were "a lot of people asking on Saks, but not a lot of takers [because of] too much going on there with potential asset sales and possible technical default on bonds due to non-filing of financial statements."

Merrill Lynch analysts on Tuesday were recommending several hedge strategies to play Saks, however, that could boost total returns sharply. (Please see full article elsewhere in this edition.)

GM convertibles fishtail

GM, the world's largest automaker, reported its steepest quarterly loss since first quarter 1992, when it reported a $21 billion loss primarily because of changes in accounting procedures for retiree health care costs. This time rising health care costs, lukewarm auto sales and special charges were blamed. A big overhang for GM, though, was its projection of 2005 net income of $1.00 to $2.00 per share, down from a previous guidance of $4.00 to $5.00.

"The results were not far off from where everyone thought. There were no surprises, in other words, on that. The big whammy is the guidance for the year," one sellside dealer said. "The [GM] converts started out pretty weak because of some hedge fund selling [the 6.25% and 5.25% bonds], then that reversed, and later in the day there was more selling in the retail issue [the 4.5% bonds]."

GM's 6.25% convertible was off about a quarter-point to 19 just in the first hour of trade, he said, but recouped most of that and settled out the day at around 19.25. Similarly, GM's 5.25% convertible was off about a quarter-point to 17 just in the first hour of trade, he said, but rebounded to settle at around 17.125.

Conversely, the GM 4.5% convertible - which is more heavily played by outright players and retail investors - was flat early on Tuesday at 22.75 but ended the day lower by a quarter-point at 22.5. The trader also noted that trading volume was heaviest in that issue.

GM's $1.95 per share loss compared to net income of $1.3 billion, or $2.25 a share, in first quarter 2004, and revenues fell 4.3% year over year to $45.77 billion. For second quarter, GM expected industrywide U.S. sales of 17 million, flat with the selling rate in first quarter, and GM estimates its share of the North America market was 25.2% in first quarter.

The most recent result was in line with Wall Street expectations and better than where GM warned investors in March that it would miss previous estimates of break-even or better with a loss.

GM spreads get junkier

GM paper is trading at junk levels and getting junkier, convertible traders said. That is giving some convertible players an opportunity to stay busy but not necessarily with the convertibles.

"There was more activity in the GM credit default swaps, the straight bonds than the converts," one convertible trader on the sellside said. "There are a number of ways to set up a capital structure trade here [in GM] or just focus on the stock, and options. There is a place for the converts in all that, but there are more convert guys busy in those other areas right now."

Banc of America credit strategists said in a report Tuesday that GM spreads are now at triple-C levels, with an implied default rate for GM at an 11.7% probability of default over the next year, "reflecting more panic than prediction, in our view."

"While in the short run the market looks to push spreads to recovery value before eventually attracting distressed investor interest, our autos sector overweight recommendation grossly underestimated the technicals ability to push spreads past long-term relative value," said Tim Patrick, a high-grade bond analyst at Banc of America, in the report.

"At levels far beyond any reasonable assessment of downgrade risk, we continue to view the autos as undervalued over the long term, but over a shorter-term horizon spreads may have to hit recovery value before stabilizing."

Much like the convertibles, GM's straight bonds gyrated in reaction to the earnings, with the 8.375s due 2033 last seen up 0.5 point at 76 bid, 78 offered.

Ford sympathetic with GM

Ford has "already faced down its demise" into junk territory, as another convertible trader on the sellside put it. Thus, he said there is "probably more upside" in the Ford story. Still, the Ford converts were off in sympathy with GM but also seesawed during the session.

The Ford 6.5% convertible trust preferred dropped about 0.125 point early in the session, he said, but closed out the day unchanged at 37.5. There was "pretty decent" volume in the issue, too, he added, ahead of Ford's earnings before the opening bell Wednesday.

Several convertible players, he said, were also interested in news that Ford's lending unit, Triad Financial, was reported to start a roadshow Wednesday for a $200 million eight-year junk bond deal.

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