Ford buying continues on Visteon bailout, GM issues join in; Calpine issues rise on pumped up debt cuts

By Ronda Fears

Nashville, May 25 - Buyers were a bit more reserved Wednesday in the convertible market but traders said the market was still feeling like it is in recovery mode following heavy liquidations over the past six weeks or so.

"Buyers held back today a bit," one sellside trader said. "They were not chasing [as] techs came in."

Another said there were a couple of big block sales this week, "but for now people are taking it in stride."

Fluor Corp. was one name he mentioned in context of heavy selling Wednesday, and he said market chatter that the underwriter for the newest convert from Ivax Corp. unloaded a big block - as much as $100 million - on Tuesday seemed to be vindicated as that issue began to trade Wednesday.

"This opened the [Ivax] issue up big time. The bonds were better, and active, which we hadn't seen since it was issued. It opened this morning with a bid of 100.375 and it went out today with a 101 bid," he said. "I think it looks cheap on swap, and I'm using a vol [volatility] in the low 30%s with a credit spread of 500 basis points over Libor, versus 350 to 400 bps when the deal came."

The Miami-based generic drug maker sold the $350 million issue in early May at par with a 1.5% coupon and 18% initial conversion premium via sole bookrunner Merrill Lynch, which then reoffered the bonds at 98. Ivax shares have been rather steady since the deal. The stock was at $19.26 when the deal launched May 3, and closed up 23 cents, or 1.19%, to $19.52 on Wednesday.

Ford convert up 0.5 pt to 39.375

Ford Motor Co.'s bailout of parts supplier Visteon Corp., which it only spun off a few years ago, has been abuzz in the markets for a while but detail emerged Wednesday that again drove Ford's convertibles higher.

Earlier this week the news was seen a negative event for Ford because of the distressed nature of Visteon's affairs but the convertible preferred kept finding buyers, leaving some sources scratching their heads. One sellside desk analyst remarked, "Go figure."

A dealer Wednesday, though, said it seems the transaction is being interpreted as a way for Ford to close some plants, thereby maybe improving its bottom line.

The Ford 6.5% convertible preferred added a half point to 39.375 on very heavy volume, he said. Ford shares, meanwhile, slipped by 2 cents to close Wednesday at $9.96.

"Shutting down the Visteon plants or selling them off is a magnificent play on the part of Ford. If they tried this awhile back outside of some event like this, they would have had a massive strike on their hands. This way, Visteon is sort of the dupe and Ford wins," the trader said. "Fundamentally, I think Ford is solid and there are a lot of long-range buyers picking this issue up."

Ford vista clouded by Visteon

Highlights of the Ford arrangement with Visteon include the transfer all Ford union employees who are currently leased to Visteon to a new Ford-managed entity. Ford will assume about $1.3 billion of employee-related obligations, including $600 million that had already been reserved in 2004.

Over time, though, Ford plans to sell most of the transferred Visteon operations to other operators. The transaction requires ratification by union employees affected by it but Ford anticipates a definitive agreement to be inked and closed by Sept. 30.

Not all convertible players were fans of the plan, though.

"What a dumb move, buying up all of Visteon's losers," another sellside trader said. "This is the dumbest thing. Absorbing all those shops will surely clobber Ford's balance sheet."

Yet, Standard & Poor's issued a report Wednesday basically saying that the bailout was a self-preservation move by Ford and the automaker's junk BB+ ratings would not be directly affected by it.

"The understanding highlights Ford's need to protect a crucial portion of its supply of parts and components while these operations are being significantly restructured and to protect its United Autoworkers employees who have been leased to Visteon," S&P said. "Previous costly efforts by Ford to support Visteon proved inadequate in the face of Visteon's deteriorating financial performance. Visteon's viability would be precarious without the execution of this agreement."

Even Ford acknowledged it was a difficult situation, saying the agreement would result in operating losses for fourth quarter of $125 million and of $200 million to $300 million for 2006, on top of special charges.

"I would say this is not a good thing, clearly," Ford chief financial officer Don Leclair said in a conference call. "It's a tough situation that we're in."

Calpine 5s soar 4.375 points

On the other end of the spectrum, Calpine Corp. revealed its intention early Wednesday to step up its debt reduction plans, including the possible cash payoff to 5% High Tides convertible preferreds holders. Calpine said it may pay off the $403 million issue to avoid further dilution if it was converted.

The news sent the preferred soaring 4.375 points to 45.375 but Calpine's 4.75% convertible bonds participated in the excitement in much smaller fashion, gaining about 2 points on the day to 53.25 bid, 55.25 offered. Calpine shares gained 66 cents on the day, or 33.33%, to close at $2.63.

"The news was good, but some of it wasn't really news, like how they are going to raise this money," such as selling U.S. oil and gas assets and a power plant in Europe, one buyside convert trader said.

Calpine said it will reduce debt by $3 billion of by year-end rather than year-end 2006 as originally announced, and will continue to trim its whopping $18 billion current debtload in 2006 and 2007.

"Calpine has set an aggressive and timely program to strengthen our financial and competitive position," said Calpine chief executive Peter Cartwright in a statement. "To operate effectively in a business environment that has changed dramatically over the last few years, we are reviewing all options to provide near-term results, while continuing to focus on long-term value. We have already recognized several attractive opportunities, which we expect will improve our operating cash flow."

Alternatives includes the sale of its 1,200-megawatt Saltend Energy Centre in Britain, which was put on the sale block some time ago and Calpine said it is nearly finished reviewing bids, and the possible sale of some or all of its domestic oil and natural gas assets.

"If they can come up with the money, they should flush out some of these bonds that are [trading] subpar, it would be smart," a sellside desk analyst said. "It's like flushing the toilet, where some of this paper is trading."

Delta drifts up on short covering

Lower risk of a liquidity crunch at Delta has sent convert arbitrageurs scrambling to cover short positions in the stock, a buyside convert trader observed Wednesday. Countering that, he said there has been some outright buying the convertibles, as heavy debt-for-equity swap negotiations from Delta are anticipated.

"I think they still file [bankruptcy], so I'm a seller" in the converts, he said. "They might make it through 2005, but when push comes to shove, I still say bankruptcy is probably still going to be the best way to restructure the debt."

Delta shares gained 8 cents on the day, or 2.45%, to close Wednesday at $3.35. The trader described the Delta 8% converts as a quarter-point better with the 2.875% issue firming by a half-point.

The capital America West Holdings Corp. was able to procure for the acquisition of bankrupt US Airways Corp., namely vendor financing, has lifted the outlook for Delta to raise capital and thus ease its own liquidity crisis, the trader said.

One way Delta is likely to try to eliminate debt is more debt-for-equity swaps, onlookers have said. The company on Monday reported in an SEC filing that shareholders have approved the increase of the number of shares that the carrier can issue to 900 million from 450 million.

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