GM, Ford head renewed move south; Delta convertibles idle after 7.7s swapped for equity

By Ronda Fears

Nashville, May 12 - General Motors Corp. and Ford Motor Co. led a new round of heavy selling in the convertible market Thursday as Moody's Investors Service cut Ford debt to near-junk, leaving the paper split-rated.

Calpine Corp. and Charter Communications Inc., another two debt-laden convertible issuers - albeit in more dire straits than GM or Ford - were mentioned sharply lower.

Delta Air Lines Inc. convertibles, though, were little changed following the carrier arranging a debt-for-equity swap with holders of about $10 million of its 7.7% straight bonds. One convertible trader said the transaction seemed to raise the value of short-dated Delta paper but the impact to the convertibles had yet to take form.

Biotechs provided one bright spot in the market, with a handful of those names getting lifted, but the tone still tended to be very negative amid ongoing chatter about big hedge funds exiting the convertible market.

News on the tape after the close from semiconductor test provider LTX Corp. that it will delay the release of fiscal third-quarter financial results was expected to wreak havoc with its securities. The company said it would delay the report, due after Thursday's close, as the result of a whistle-blower allegation from an anonymous caller who appeared to hang up before completion of the call.

Aside from event driven selling in the market, big withdrawals continue to underscore ill moods.

'If' sentiment battles emotions

"It was pretty ugly today," said a sellside trader. "It's an emotional market right now. People are not reacting to valuations but reacting to fear."

There will be a big trade print, he said, and everybody begins to try to figure out who it is that's selling, whether they are selling out altogether or just this one name.

"People like to think of themselves as independent thinkers, but we're all just part of a herd," he said. "Having been through this all before, having survived LTCM [Long Term Capital Management], doesn't necessarily help or make you feel smart. A lot of smart people are losing money in this market right now. A lot of smart people were involved with LTCM."

LTCM was a hedge fund launched in 1993, and the founders included two Nobel Prize-winning economists, Myron Scholes and Robert C. Merton. Scholes, among other things, developed along with the late Fischer Black, the widely used Black-Scholes formula for option pricing. LTCM's lineup also included John Meriwether, a former vice chairman of Salomon Brothers and famous bond trader, and David Mullins, a former vice chairman of the Board of Governors of the Federal Reserve. After the Russian defaults in 1998 that ripped throughout the markets, LTCM was crushed and ultimately disbanded in 2000 following a $3.65 billion bailout prompted by the federal reserve.

What having survived down cycles in the market does give players right now, the trader said, is akin to the beginning of Rudyard Kipling's poem about maturity, "If you can keep your head when all about you are losing theirs..."

That said, he agreed with many other traders who say bidders are a minority in the market these days.

"There are lots of buying opportunities," the trader said, "just not a lot of courage."

Ford 6.5s hit by Moody's cut

Ford's convertible tracked the stock lower Thursday following a downgrade by Moody's although the debt remains investment grade with a negative outlook. But the No. 2 automaker's split-rated bonds, which were cut to junk by Standard & Poor's last week, were described by high-yield traders as little changed.

The 6.5% convertible preferreds, with a par of 50, dropped 0.625 point to 36.75 on Thursday, while Ford shares lost 28 cents, or 2.9%, to $9.36. Ford's 7.45% straight bonds due 2031 were said to be steady at 76.5 bid, 77.5 offered.

"We saw the Ford spreads widen a bit on the Moody's news and then snap back," said a convert trader.

Part of the initial reaction to the Ford news, he said, was recollection of the reaction last week to the S&P event, when Ford suspended sales under its commercial paper program. Traders shortened positions out of fear that would happen Thursday, but that turned out not to be the case.

GM was still a main focus, he said, as hedge funds were rumored to still be unwinding positions in the top automaker convertibles. Those three issues, all $25 bonds, each lost ground Thursday. The GM 6.25% convertible dropped 0.125 point to 19.375. The GM 5.25% convertible lost 0.25 point to 16.375. And, the GM 4.5% convertible was down 0.0625 point to 23. Meanwhile, GM shares continued to lose ground, off 38 cents on the day, or 1.23%, to settle at $30.62.

Delta holders watch swaps

Delta Air Lines has negotiated with holders of $10 million in principal of 7.7% unsecured notes due this coming December to exchange their debt for 2.89 million common shares, and convert traders said it gave a boost to other short-dated Delta bonds, but convertible holders were just watching the situation closely.

It may portend a "bankruptcy reorganization without the filing" as one buyside source observed, or, as a sellside observer pointed out, it may reduce the number of debtors ahead of convertible holders in the event of a bankruptcy filing. The former may not be desirable to convertible holders, but the latter could be beneficial.

"Time will tell," as to the impact of Delta's maneuverings to avert bankruptcy, a sellside convertible trader said.

The swap of the 7.7% issue only takes a small slice of the issue, as Delta reported earlier that as of Dec. 31, 2004 there was $167 million of the notes outstanding.

"The debt-for-equity swap they did yesterday gave that short paper a 79 value while it had been at 72 before. It is trading up today. If the equity cooperates and they can do some decent amounts of these swaps they can relieve themselves of quite a bit of the near-term threat. It is a negotiating play to all creditors, employees," he said.

"They're only dealing with the closest maturing paper - others they can work on later."

Bankruptcy is still seen as an inevitable event by many onlookers, but the Delta convertibles were described as little changed with little traffic on Thursday. The 8% issue settled at 29.5 bid, 31 offered and the 2.875s at 25 bid, 26.5 offered, both up slightly.

Delta shares added 3 cents on the day, or 1.04%, to end at $2.77.

Calpine crushed

Calpine warned of a cash shortfall with cash needs in the next year outpacing cash from operations and cash on hand, and the San Jose, Calif.-based independent power producer said that maintaining sufficient liquidity depended on the success of selling assets to raise money.

Moody's also downgraded Calpine credit, but that came late in the day and convertible traders pretty much shrugged it off as a non-event, saying the rating agency was late on the draw.

"With the stock under $2.00, the downgrade doesn't mean much to anyone," one trader added.

The Calpine 4.75% convertibles traded just under 50 on Thursday, he said. That would put the issue off by about 1 point from the close Wednesday by another trader's account. The 6% convert was quoted by yet another sellside shop lower by 2 points at 57 bid, 58 offered.

Calpine shares dropped 8 cents on the day, or 4%, to $1.91.

"Satisfying all obligations under the company's outstanding indebtedness, and funding anticipated capital expenditures and working capital requirements for the next 12 months presents the company with several challenges over the near term," Calpine said in its quarterly report filed at the SEC.

At March 31, the company said its cash and cash equivalents on hand totaled $800 million, with $500 million of that available.

Moody's noted that Calpine's financial performance in 2004 was weak, with funds from operations of $147 million being equivalent to less than 1% of its $18 billion in consolidated adjusted debt, and matters did not improve in first quarter.

Biotechs a bright spot

Collectively biotechs are a big lot of the convertible market, but individually those are typically very small issues. Yet, traders said they continued to see some upward movement, and activity, in a handful of those issues as potential takeovers continue to fuel some optimism - contrary to concerns about takeovers in some cases.

CuraGen Corp.'s 6% convertibles were said to be up 5 points on the week, at 90 bid, 92 offered on Thursday, with news on the tape that CuraGen may receive as much as $62 million from Roche Holding AG in the next five years for a DNA-mapping technology.

ViroPharma Inc. continued to gain Thursday, as well.

Elan Corp. plc advanced, too, on renewed hopes that its drug Tysabri will return to the market after Elan and marketing partner Biogen Idec Inc. pulled the drug in late February over safety concerns.

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