LifePoint closes higher; Human Genome also gains, but automaker, REIT convertibles track lower

By Rebecca Melvin

Princeton, N.J., Aug. 5 - A new LifePoint Hospitals Inc. convertible got a relatively warm reception from investors on Friday, but ailing Delphi Corp., which doesn't even have convertible paper, stole the focus of the session, contributing to a drop in General Motors Corp. and Ford Motor Co.

Trading in real estate investment trust convertibles was somewhat active, with buyers coming in on swap in several issues, as stocks fell about 2%, traders said.

The new convertible of Human Genome Sciences Inc. gained 0.5 point, while the biotechnology company's older 2.25% convertible issue lifted for a second day.

The new convertible of LifePoint Hospitals traded up out of the gate and rose 1 point to 1.5 points on Friday before it closed at 101.125 bid, 101.375 offered.

The 3.25% convertible due 2025, with an initial conversion premium of 35%, was helped by a gain in its underlying stock of 97 cents, or 2.14%, to $46.32.

"It went well; the stock helped us," a syndicate trader said.

The Thursday breakfast deal priced in the middle of talk for the coupon of 3% to 3.5% and at the cheap end of talk for the initial conversion premium of between 35% to 40%.

Based in Brentwood, Tenn., LifePoint Hospitals is a provider of health care services in non-urban communities.

GM, investors weigh options

The convertible bonds of General Motors traded down amid a flurry of news on the tape about Delphi Corp., its largest parts supplier and former subsidiary, which received a triplicate of downgrades Friday in the aftermath of news related to possible restructuring and speculation about a potential Delphi bankruptcy.

Ford Motor Co. convertible preferred bonds and common stock also fell.

One sellside analyst said that GM was too large to be affected significantly by the Delphi news and that the downward move in GM was likely due to a combination of profit taking after a positive run for the automakers, as well as concerns related to Delphi.

But a sellside trader said, "Everybody's concerned that GM will bail out Delphi and provide liquidity, and that will weigh on GM's balance sheet."

"They [GM] have to weigh whether to let go of the business and let them file, or help them out," the sellside trader said.

A buyside source, who was short the 4.5% GM issue and glad to see it trade down, said he was weighing his options regarding Delphi stock and debt.

Troy, Mich.-based Delphi, which is the largest U.S. maker of auto parts, confirmed that it's in talks with its main unions and General Motors to find a way to restructure the company to avoid bankruptcy.

Speculation regarding a favorable outcome on this front spurred a rally that boosted Delphi shares by 10% on Thursday.

But on Friday, sentiment turned negative and its stock plunged 14% after the company disclosed that it was drawing on its $1.8 billion credit line to finance operations, and three ratings agencies responded with downgrades.

Delphi said it had already initiated a draw down of $1.5 billion on Wednesday to provide short-term operating liquidity as it seeks to restructure operations through concessions with the United Automobile Workers.

Standard & Poor's then cut Delphi's corporate credit rating to CCC+ from B+, took its senior unsecured rating to CCC- from B- and lowered its short-term rating to C from B-3.

Fitch Ratings downgraded the senior unsecured debt rating of Delphi to CCC from B and the rating on the trust preferred securities to CCC- from CCC+. The bank facility was downgraded to B from BB-.

Following suit, Moody's Investors Service downgraded Delphi's corporate family rating to Caa1 from B2. Its senior secured bank credit facilities, which are under a monitored borrowing base, were lowered to B3 from B1, and its senior unsecured ratings were cut to Ca from B3.

Moody's said the $1.5 billion draw down "has placed liquidity on its balance sheet to address what will likely be a period of increased operating and financial risk as it seeks to negotiate a consensual restructuring of its U.S. operations."

Moody's said the outlook remains negative. S&P said the outlook is developing, and that concerns about a potential bankruptcy filing have increased in light of recent public comments by its top executives, and the initiation of the revolving credit facility draw down.

CreditSights auto analyst Glenn Reynolds said in a report Friday that Delphi's draw down is "a time honored way to send a message of seriousness even if the costs of filing this early far outweigh the benefits for DPH."

Reynolds said that it would be too costly for GM to do nothing and that while the steps it will take are not clear, it is likely to be "looking to keep the effects more concentrated on GM's balance sheet and cash flow statement (buy assets, extend credit, accelerate payment cycles, assume tooling costs, etc.)."

"They certainly do not want to face contingent postretirement exposures that are on the hook through October 2007," Reynolds concluded.

Delphi, which operates plants in Oak Creek, Mich., said it will release more information on Monday when it reports its second-quarter earnings.

The GM convertibles - $25 bonds that are typically big among retail investors - all moved down, with heavy volume in the 4.50% convertible early in the session due mainly to a few large trades including one of 600,000 shares, a buyside source said.

The 4.5%, which is generally the least actively traded issue, is "relatively busted," a New York-based sellside analyst said. "It's putable at 25 in '07, and is really just a yield play."

The 4.50% closed down 0.15, or 0.61%, at 24.50.

The 6.25% issue, which Lehman Brothers' analysts recently recommended as a proxy for stock, fell 0.61, or 2.76%, on Friday to 21.46. The 5.25% issue lost 0.22 point, or 1.14%, to 19.44.

Meanwhile, GM stock ended the day down 86 cents, or 2.39%, at $35.19.

GM is less tied to Delphi than Ford is to its main supplier Visteon Corp., analysts say, as Visteon leases UAW workers from Ford to operate several unprofitable U.S. plants. Visteon and Ford hope to close on their restructuring deal by the end of September.

The convertible preferred shares of Ford Motor Co. moved down apparently in sympathy with GM, closing down 0.59, or 1.42%, to 40.83. Ford shares lost 2.6% to close at $10.36.

Human Genome convertibles up

Three out of four Human Genome Sciences convertibles gained Thursday as its share price lagged modestly. Among the gainers was the new 2.25% issue that slumped Thursday, its first day of trade. A syndicate source said the moves were related to players repositioning their holdings.

The new 2.25% bonds traded up to 96.75 bid, 97.25 offered, compared to a close of 96.5 on Thursday, when investors favored the company's older paper instead of the new issue.

The Rockville, Md.-based drug-discovery company sold $230 million of seven-year convertibles with a 2.25% coupon and a 20% initial conversion premium through bookrunners Merrill Lynch and Citigroup, which reoffered the bonds at 98.5.

Human Genome Sciences' older 2.25s due 2011 traded up nearly 2 points Friday to about 107 bid, 107.50 offered, compared to 105.625 traded on Thursday.

The 3.75% issue due 2007 also gained 2 points during the session, trading at 100.85, compared to 98.5 both early in the session and on Thursday.

The company plans to use proceeds of the new issue to repurchase part of the 3.75% convertible and a 5% convertible due 2007, which traded on Friday at 98, down a point from 99 on Thursday.

Its shares shed 10 cents, or 0.74%, to $13.42.

Traders eye REIT swaps

The convertibles of several REIT names, including Affordable Residential Communities Inc., Reckson Associates Realty and Vornado Realty Trust, traded lower as their shares dropped 2% on average on Friday. MeriStar Hospitality Corp., a luxury hotel and resort REIT, also saw its shares decline 2% on Friday.

"The volatility credit spread widened to 400 basis points over Libor," a sellside trader said regarding the REITs, adding that there were buyers for Reckson and Vornado on swap but not on an outright basis.

Affordable Residential Communities' 7.75% convertible, which entered the convertible trading universe on Thursday, traded off at 102.5 bid, 103 offered, compared to a close of 103.125 on Thursday. Its shares lost 32 cents, or 2.6%, to $11.99.

Reckson's 4% convertible due 2025 traded at 99 bid, 99.50 offered, compared to a previous level at par to 100.5. Reckson shares lost 77 cents, or 2.24%, to $33.55.

Vornado Realty's 3.875% convertible traded between 104.50 and 105.75 on Friday, compared to a level at 106 bid, 106.5 offered. Vornado shares shed $1.61, or 1.85%, to $85.39.

MeriStar Corp., based in Arlington, Va., on Wednesday announced that it would sell 30% of its portfolio by the end of the year, including properties in Florida, in an aggressive asset sale and debt repurchasing program to take advantage of the current selling environment.

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