Usual suspects shake up markets, Ford sinks into uncharted territory

By Ronda Fears

Nashville, Tenn., Oct. 9 - As major stock indexes fell to five-year lows and credit spreads continued widening in record-breaking trends, convertibles were hit but remained active.

There was a brush with what resembled excitement in the market on a rumor that Motorola Inc. would launch a mandatory Wednesday or Thursday, but the buzz never materialized as a deal.

Of course with converts so busted, the latest "usual suspects" - Ford Motor Co., banks and utilities which once were the targets in flights to quality - were the scapegoats.

There was a massive sell-off in the Ford convertible trust preferreds and Ford spreads continued to widen.

Overall, convert traders said flow was decent with good two-way activity in general.

Buyers indeed were seen milling about in converts, albeit from unconventional areas.

"The big theme is that there are a lot of people outside our market sniffing around in our market," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

While crossover buyers typically have not been a source of much volume in convertible trading, they have traditionally come from the junk bond market.

Now, traders said, there are some distressed boutiques thumbing through convertibles.

"By default, a lot of convertible holders have become investors in distressed paper," said one dealer.

"We have been seeing some crossover buyers, more than average, probably for the past six months. Some from high yield, some distressed."

One such trade was seen for the Charter Communications 5.75% convertible due 2005, a trader said.

Stocks plunged on trimmings to stock and earnings targets for Ford and General Electric Co., as well as a blow from the Moody's downgrade to JPMorgan Chase credit.

"Downward spirals in financial markets are usually interrupted by big players invoking the sanity clause, i.e. taking a longer-term view on credit developments through the provision of credit, and even private equity," said David Goldman, head of research in Banc of Americas' global markets group.

"Crises are nothing new in the financial markets and neither are downward credit spirals. What makes this particular spiral interesting, however, is that a circuit breaker - the role of large financial institutions - has been compromised."

Not only does that make the end of the spiral more difficult to forecast, he said, it also narrows the range of available options for credits on the mend. This is an added complication to what he said was already a fairly complex situation.

Ford continued to be a focal point from the credit perspective.

Spreads on five-year Ford paper blew out to around 710-675 basis points, which one derivatives trader described as "uncharted territory."

Of course the like of other investment grade names such as Tyco International Ltd. and El Paso Corp., and now TXU Corp., could give witness to Ford about the repercussions of market perception on their credit standing, regardless of the credit ratings.

Ford's 6.5% convertible trust preferreds due 2032 fell 3.5 points to 31.6 with eye-popping volume of 8.2 million shares changing hands, versus the 30-day average volume of 748,000 shares.

Ford common stock closed down 60c to $7.15.

Ford has a Herculean task ahead, said Tim Patrick, head of high grade bond research at Banc of America Securities, in a report Wednesday.

Patrick said to expect more of the same until the tone in the corporate bond market settles down and improves, Ford announces fundamental progress on its revitalization program or bond prices get to such levels that accounts are compelled to buy.

"We have not seen traditional high grade accounts buying on weakness lately, at least not in size. Alternatively, some accounts are scaling auto/Ford positions back to index levels, which is pressuring spreads," Patrick said.

"It's simply not a good time to explain to your customers why you have a better than market bet on Ford. [And,] The high yield market is not generally stepping in at these levels."

While Ford's presence is profound in the high grade, and even high yield, markets, it has a much more muted impact on converts, as a new re-entrant. The Ford convert was brought to market at the beginning of the year and while the $4.5 billion issue is large as a single issue, it's only a fraction of the market's total value of an estimated $196.5 billion.

In corporates, Ford and Ford Motor Credit Co. account for about $165 billion of the $400 billion in auto paper outstanding.

Bear Stearns' high yield desk, on a customer inquiry about Ford's potential weight in the high yield market if downgraded, said the roughly $60 billion on a market value basis for both Ford and Ford Motor Credit would represent about 17% of the market weight of the firm's high yield index.

Financial issues also took another blow after Moody's cut JPMorgan.

Utilities suffered more, as well, on TXU Corp.'s woes along with Dominion Resources' announcement that it would issue $1 billion of equity sometime soon.

Dominion's news sent the stock down $5.35 to $36.49 and the converts followed suit, although volume in the converts was not as dramatic as in the common. The new mandatory lost 5.43 points to 36.89 and the old mandatory fell 4 points to 39.6.

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