GM, Ford convertibles sell off on massive, mounting pension liabilities

By Ronda Fears

Nashville, Tenn., Oct. 16 - General Motors Corp. and Ford Motor Co. convertibles sold off Wednesday on growing concerns about the massive unfunded pension liabilities that are mounting for the automakers.

Ford was also getting pressure as it reverted to a net loss in the third quarter.

GM's 5.25% convertible due 2032 dropped 1.15 points to 20.55 and the 4.5% due 2032 lost 0.53 point to 22.92. GM shares closed down $2.56 to $34.14.

Ford's 6.5% convertible trust preferred fell 2.3 points to 34.5. Ford shares ended off 61c to $8.26.

"Automakers are weak on pension worries. Look at GM, which is down almost $1.50 on [the] downgrade and general concerns," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"Ford was also down but not as much. Ford was the first to get hammered two weeks ago, so the bad news is already [priced into] the stock."

But the convertibles may see buyers step in if there is any conviction the dividend on either of the underlying common stocks will get cut.

"It [a common dividend cut] would be a great thing, unless there would be a perception of a credit problem" like TXU Corp. cutting its common dividend by 80% earlier this week specifically to avoid a downgrade, said a convertible trader at a hedge fund in New Jersey.

"Sometimes it's just a matter of conserving cash and not that they're in dire straits. In the TXU situation, a lot of [convert arbs] made money."

Both were impacted from a credit standpoint, as well, as Standard & Poor's cut GM's senior debt to BBB from BBB+ and put Ford's BBB+ senior rating on watch for a potential downgrade to BBB.

"Obviously, people are interested in the credit scenario, but what people are focused on is whether there is any potential for any dividend cuts," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

While it is possible, Howard said Deutsche's auto analysts don't believe it's highly likely.

For one thing, both GM and Ford are very high-profile retail names, even with regard to the convertibles, so that will be perceived as a measure of last resort.

Still, Howard pointed out, as did S&P analysts, that practically all of GM's available cash over the next year or so will have to be diverted to the pension plans.

GM disclosed that its U.S. pension plans could be underfunded by a massive $21 billion to $23 billion at year-end 2002. That assumes the asset return is 0% in fourth quarter, following erosion of 10% in the first nine months.

S&P, however, puts GM's total, worldwide underfunding at $26 billion to $28 billion, compared with $12 billion at the end of 2001.

"We view unfunded pension liability as debt and any increase impacts leverage," said S&P credit analyst Scott Sprinzen on an S&P teleconference call.

GM's ratings, however, are also pressured by the weak operating performance of 20%-owned Fiat and the snafu that GM's planned sale of Hughes Electronic Corp. to EchoStar Communications Corp. has hit at the FCC, S&P said.

Forestalling more of a negative impact on GM's credit profile has been the remarkable progress made in improving the competitive standing and financial performance of its North American automotive unit, as well as the earnings stream from General Motors Acceptance Corp.

"Ford is a real study in contrast to GM," said Sprinzen.

"In some ways, Ford does have the stronger balance sheet of the two companies."

Liquidity is strong at Ford with some $25.7 billion in cash, he said, but due to the credit market's reaction to Ford's situation and the widening of credit spreads, it is virtually limited to the asset-backed securities market for new capital.

"There's an exaggerated public perception to Ford's woes," Sprinzen said.

"We think that it's irrational and inexplicable."

But, it's real, he said, and the impact has to be accounted for from a credit ratings standpoint.

Ford disclosed that its U.S. pension plans are now underfunded by $6.5 billion.

S&P estimates Ford's total underfunding is well in excess of $10 billion, compared with underfunding of $2.5 billion at yearend 2001.

S&P's watch-listing, however, primarily reflects concerns about the adequacy of restructuring measures being implemented by Ford to restore the competitiveness its core automotive operations.

After moving results into the black in second quarter, Ford reported a net loss for third quarter although it narrowed to $326 million from a loss of $692 million a year ago.

Ford chief executive Bill Ford Jr. said the company's turnaround plan, begun in January and in which the convertible plays a role, is gaining traction after a slow start.

But he also said the company needed "to bring a greater sense of urgency" to its restructuring effort and stressed, in a conference call that it is looking at ways to accelerate its cost-cutting efforts.

"We're going to step on the gas," Ford said.

On the S&P call, it was noted that no actions were taken regarding DaimlerChrysler AG.

"We're comfortable with the stable outlook and the BBB/A-2 ratings" on DaimlerChrysler, Sprinzen said.

"The overall earnings should be good this year and net liquidity has improved."

The Daimler convertible, a 4.125% issue denominated in German marks, did not get any mileage out of that, however, since it matures in July 2003.

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