CenturyTel credit default swaps blow out on new takeover rumor; GM, Ford ease ahead of weekend

By Ronda Fears

Nashville, May 13 - Convertible players were bracing themselves for Monday, and no one wanted to be long over the weekend that encompasses the dreaded May 15 deadline for redemption notices to withdraw money from funds on June 30.

"Monday is going to be key, as redemption notices have to be in by the 15th," said a buyside trader. "Ahead of that, it was very quiet today."

From talking with sources on both sides of the market, traders seem to think that the contraction in the convertible market will not turnaround until July, at the earliest, because of the June 30 withdrawals. Moreover, many fear that beyond midyear the market will continue in a lackluster fashion because of the summer, with no sign of an upturn until the beginning of fourth quarter.

General Motors Corp. and Ford Motor Co. were high profile losers in advance of the noteworthy weekend.

Auto derivatives on wild ride

GM and Ford getting cut to junk by Standard & Poor's was blamed for the monumental gyrations in the credit markets this week. But onlookers said Friday the turmoil seemed to have stabilized somewhat though convertible players may still be in for a wild ride, at least until withdrawals from the market subside.

"I think that when we see who blew up in the CDO [collateralized debt obligations] correlation trade - and to what magnitude, then the volatility in credits might decrease," said a fund manager on the West Coast.

At least two large European hedge funds and several international bank proprietary desks were rumored to have lost big money on derivatives linked to GM and Ford, and that ignited a fearsome unwinding in the United States that, in turn, spilled into the credit default swap market and blew out credit spreads.

Yet, in a report Friday, S&P said the European CDO market "has passed its most widespread test to date," noting that although GM and Ford are two of the three credits most commonly included in CDO structures, the secondary effect of downgrading those two will be minimal because the average CDO incorporates more than 100 companies. For instance, S&P said that of 745 CDO tranches it rates only 10 will be cut as a result of GM and Ford actions.

On Friday, GM shares gained 29 cents, or 0.95%, to close the week at $30.91. But its three convertibles, each a $25 bond that trades on the New York Stock Exchange, all lost ground amid modest volume.

Ford's 6.5% convertible preferred also slipped, by 0.375 point, to 36.375 while the underlying stock ended off by 7 cents, or 0.75%, to settle Friday at $9.28.

Follow 'smart' money trail

Some are saying the convertible market is looking cheap amid all the selling; others say it only looks cheap relative to where it has been in recent years - ridiculously expensive.

With some status-worthy investors taking big stakes in stocks, however, that could lend credence to cheapening arguments. And at the very least, some argue that the widening in credit spreads has lead to an uptick in stock volatility from historical low levels. The Nasdaq volatility index ended Friday at 18.41 and the old VIX at 16.32, after having dipped below 15 in recent times.

One market source is hoping that volatility in the credit and equity markets will converge to create an opportunity to make money.

"My only 'idea' of the day is: with at least two billionaires taking large stakes in some equities (Kerkorian and Icahn) then maybe some equity is actually cheap," the fund manager said. "Credit has reached some attractive levels and volatility measures in equities are confirming this widening. If [credit] widening could slow down more than equity vol picks up, then maybe yours truly makes some coin."

Billionaire investor Carl Icahn recently bought technology and energy stocks including Hewlett-Packard Co. and Kerr-McGee Corp., and other shares such as Rite Aid Corp., according to SEC filings Friday. A week ago, another billionaire investor, Kirk Kerkorian, aired an interest in boosting his stake in GM to 9% from 4%.

"Right now what has worked is buying CDS in equities with flat sales, low book to equity, [with] market caps less than $2 billion and have strong free cash flows - all LBO candidates," said the fund manager.

CenturyTel credit blows out

Amid fresh takeover chatter, CenturyTel Inc. credit default swaps exploded Friday, market sources said, but the Monroe, La.-based local phone company's convertibles held steady along with the underlying stock.

The CenturyTel CDS paper started Friday at 85 basis points to 87 bps over Libor and blew out to over 105 bps amid takeout rumors and or LBO risk, the buyside source said. CenturyTel shares closed Friday off 3 cents at $30.32. The 4.75% convertible bonds were pegged at 103.5 bid, 104.5 offered by a dealer.

Contraction in the wireless sector has sparked increased attention in recent months to the rural or regional phone sector with onlookers expecting a new phase of consolidation in that group.

There is not a whole lot of paper left in the wireless sector vulnerable to takeover risk following the Sprint/Nextel, Cingular Wireless/AT&T Wireless and Alltel/Western Wireless deals last in 2004 and early 2005, a sellside trader said.

"As I've said for a while, the most obvious area to focus on when you are looking for takeover situations in phones is the rural ILECs [incumbent local exchange carriers], and how they could move into wireless, like Alltel did with Western Wireless," the trader said.

In addition to CenturyTel, Citizens Communications has been a focal point, he said, since it has already attempted a merger. Last summer, Citizens, a Stamford, Conn.-based rural ILEC, abandoned bid solicitations that had been sought since February 2004, saying it had decided to remain an independent company after an apparent fruitless exercise that lasted about four months.

Fire sale or flea market?

Many of the convertibles for sale are forced by redemption pressures, dealers say, buy some uninvolved bystanders on the buyside say they aren't yet tempted to become bidders.

"You're still not getting like a real bargain, even though most of this stuff is on the table because a lot of fellas are under redemption pressure," said one convertible hedge fund manager.

It's not that the paper involves esoteric and/or illiquid names. In fact, onlookers say most of the offers involve large chunks of convertibles.

Some seen for sale Friday were Lowe's Cos. Inc., Beazer Homes USA Inc. Mercury Computer Systems Inc., International Game Technology Inc., Amgen Inc. and Conexant Systems Inc.

Also shopped were Amkor Technology Inc. and Teradyne Inc., according to one source, and another added Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and a couple of real estate names like Vornado Realty Trust and Simon Property Group Inc.

"[There's] no give up on the sellers by the bookies, so at least there is some honor among thieves," quipped the buyside source.

But another buyside source, who was a seller on Friday, lamented the lack of bids.

"There are either no bids or the bids are in the hole," he said. "Even with something like Kansas City Southern. That's a nice preferred with a low premium and the breakeven to call is reasonable. But there's nothing but sellers. No one wants to buy these."

Upgrade lifts Northwest

There were some small takers for "select" airline paper Friday, a sellside convertible trader said. On an upgrade to Northwest Airlines Corp. stock by Lehman Brothers, he said the two Northwest converts caught a bid that pushed both issues up about 2 points on the day.

Northwest shares, meanwhile, rose 40 cents, or 8.83%, to close at $4.93 following a similar gain Thursday on an upgrade by JPMorgan.

"To buy any of the airlines, though, it still takes a strong believer. There is a lot of risk in this stuff," the sellsider said.

Countering Northwest's upward move, virtually all the other airline paper drifted farther south, he said.

Delta Air Lines Inc.'s chief financial officer made a presentation at the Bear Stearns transportation conference Friday, saying the Atlanta-based carrier would be looking to do more debt-for-equity swaps, which convertible players are watching closely.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.