All eyes on autos as GM, Ford downgraded to junk; Lazard new mandatory dips below issue

By Sara Rosenberg

New York, May 5 - The attention getters of the day in convertibles -were by far General Motors Corp. and Ford Motor Co. as both were downgraded to junk by Standard & Poor's. Meanwhile, Lazard Ltd.'s newly priced mandatory convertibles held in around issue price throughout most of the session but gave up a little ground at the end of the day along with the equity.

GM's convertibles were lower across the board, with the GBM issue dropping $0.54 or 3.11% to $16.80, the GPM issue dropping $1.11 or 5.56% to $18.87 and the GXM issue dropping $0.16 or 0.69% to $22.99 on news of the downgrade. The stock closed down $1.94 or 5.91% at $30.86.

Meanwhile, Ford's convertible also sold off after the downgrade, with the 6.5% convertible trust preferred dropping $1.52 or 3.81% to $38.39. The stock closed down $0.46 or 4.53% at $9.70.

On Thursday, S&P lowered GM's long- and short-term corporate credit ratings to BB/B-1 from BBB-/A-3, with the rating outlook set on negative.

"The downgrade to non-investment-grade reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages," S&P said. Of greatest immediate concern to the rating agency is that the company's sport utility vehicles will no longer be as profitable as they have been in recent years.

"Still, GM should not have any difficulty accommodating near-term cash requirements. The effort by Kirk Kerkorian's Tracinda Corp. to increase its ownership stake in GM represents an additional uncertainty; however, this is not a factor at all in the current rating action," S&P added.

The negative outlook reflects the fact that GM's financial performance has proven to be volatile and unpredictable, the rating agency added.

Also on Thursday, S&P lowered Ford's long- and short-term corporate credit ratings to BB+/B-1 from BBB-/A-3, with the rating outlook set at negative.

"The downgrade to non-investment-grade reflects our skepticism about whether management's strategies will be sufficient to counteract mounting competitive challenges," S&P said. The greatest immediate concern to the rating agency for Ford was the same as for GM - that sport utility vehicles will not be able to generate the profitability they have historically enjoyed.

The negative outlook reflects the assumption that it will be difficult for Ford to improve its automotive profitability from the roughly breakeven level anticipated for full-year 2005, the rating agency added.

GM is a Detroit, Mich.-based automaker. Ford is a Dearborn, Mich.-based automaker.

Lazard dips by day's end

Lazard's three-year non-callable mandatory convertibles traded mainly around the $25 issue price for the majority of the day, however, by close, levels dropped off to around 24 3/8 bid, 24 5/8 offered as the company's new stock sold off, closing out the session down $1 to $25, according to a trader.

"It was okay active. I don't think it was anything crazy," the trader added.

After the close Wednesday, Lazard sold the $287.5 million mandatory issue at par of $25 to yield 6.625% with a 20% initial conversion premium. The deal priced closer to the wide end of dividend price talk of 6.25% to 6.75% and at the cheap end of premium guidance of 20% to 24%.

Concurrently, the French investment banking house, which was previously a privately held partnership run by Bruce Wasserstein, sold approximately 34 million shares of common stock at $25.00 per share in an initial public offering.

In addition to the IPO and public convertible sale, Lazard is issuing a $150 million exchangeable with terms expected to mirror the mandatory and $50 million of common stock to French bank Ixis.

Wasserstein plans to use proceeds of the Lazard offering to buy out the 36% stake in the firm owned by Lazard chairman Michel David-Weill and his allies, including the French investment firm Eurazeo SA. David-Weill in October demanded that Wasserstein pay him and allies $1.62 billion in cash for their controlling stake.

Goldman Sachs & Co. Inc. is sole bookrunner on the convertible deal and co-managers included Citigroup, Lazard, Merrill Lynch, Morgan Stanley, Credit Suisse First Boston and JPMorgan.

The mandatory was upsized by $37.5 million from $250 million but the $37.5 million greenshoe was eliminated, so overall the amount sold essentially stayed the same.

FLYi weaker

FLYi Inc.'s 6% convertible fell off by about 5/8 of a point on Thursday to 31.61 bid, 36.61 offered, according to a trader, versus a closing stock price of $0.83, which was down $0.09 or 9.78% on the day.

The Dulles, Va.-based parent company of low-fare airline Independence Air reported preliminary financial and operating results for the first quarter, that included an expected net loss of $105 million or ($2.28) per diluted share compared to first quarter 2004 net income of $3.6 million or $0.08 per diluted share.

In February, FLYi completed a financial restructuring, rescheduling debt, issuing stock to creditors and paying the overdue coupon on its convertibles.

The company is now in the process of finalizing its analysis and review of accounting for the restructuring. "That analysis may result in changes which could further increase the net loss and reduce shareholder equity for first quarter 2005 when the company files its first quarter report on form 10-Q," a company news release warned.

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