CapitalSource jumps; GM, Ford, retail names weaken; two new deals launched

By Rebecca Melvin

Princeton, N.J., Sept. 19 - The convertibles of CapitalSource Inc. jumped on Monday on an outright basis but came in on swap after the Chevy Chase, Md.-based financial company said it was converting to a real estate-investment trust starting in January.

The two CapitalSource convertible issues have dividend protection, which helped the outright players; but they don't have takeover protection, which hurt the hedge players as the paper moved closer to par, trading sources said.

The convertible bonds of General Motors Corp. traded lower in mostly heavy volume as the stock fell amid worsening fears that Delphi Corp., the largest U.S. auto parts supplier, could file for Chapter 11 protection as early as next month, a New York-based sellside trader said.

The struggling parts supplier, which saw its high-yield bonds weaken during the session, was spun off by GM in 1999 and has been seeking a financial bailout from its former parent. The convertible preferreds of Ford Motor Co. were also lower Monday.

After the close, New York law firm Milberg Weiss said it filed against GM a class action lawsuit claiming that the world's largest automaker misled investors about its financial outlook before a March earnings warning that sent its shares and debt sharply lower.

Also trading were the convertibles of Maxtor Corp. and Human Genome Sciences Inc., as well as retail names like The Men's Wearhouse Inc., Lowe's Cos. Inc. and TJX Cos. Inc. The issues were weaker amid fears that post-hurricane energy costs could put a crimp in consumer spending, particularly this winter, a New York-based sellside trader said.

Meanwhile, two new convertible issues were launched on Monday with pricing expected Wednesday and Thursday. The first launch, which came before the open, was for $150 million of convertibles from Pittsburgh-based Wesco International Inc., and the second, which was to come after the close, was for $125 million of convertibles from Houston-based Cyberonics Inc.

REIT conversion boosts CapitalSource

The convertibles of CapitalSource jumped on an outright basis, but hedge investors were hurt after the commercial financing company said its board of directors voted to convert to a REIT.

The move will increase the conversion ratio on the two bonds, which is good for holders but also expected to reduce volatility, not withstanding Monday's nearly 23% stock surge, which is undesirable for hedge plays.

"The convertibles will be more equity sensitive, more appealing to buy-and-hold players," said a Connecticut-based sellside analyst of convertibles in the financial space.

As for company's decision, the analyst said, "It made a lot of sense. What they have done over the past few years is shift to more asset-based lending, and a fair amount is secured with real estate."

But he didn't see other financial names with convertible paper making similar moves. "Most other companies that would be in that position have either done it already or decided not to," he said.

CapitalSource Inc. announced Monday that its board of directors approved a plan to be taxed as a REIT starting in January and that it will pay a dividend of $2.15 a share in 2006 and $2.90 a share in 2007.

It also said it expects earnings of $1.35 a share for fiscal 2005, including an adjustment of 18 cents a share related to modification of its reserve for loan losses, which it has decided to increase to 1.42% effective in the third quarter.

To meet the requirements for REIT qualification, CapitalSource intends to make a special, taxable dividend of its pre-Jan. 1 undistributed earnings and profits currently estimated to be $325 million to $375 million.

CapitalSource's 1.25% convertibles due 2034 traded at 93, up 7 points from about 86 on Friday. The 3.50% convertibles, also due 2034, traded at 95.5 and were seen at 95.5 bid, 97 offered near the end of the session, compared to about 89 on Friday.

A buyside source using a delta of 65 to 70 estimated that the bonds came in on swap by about 2 to 3 points. But a sellside source said that the amount the bonds came in was closer to about 1 to 2 points.

CapitalSource shares surged $4.24, or 22.7%, to $22.95.

GM, Ford slide amid credit worries, suit

The convertibles of GM and Ford were down, with the GM 6.25% $25 convertible bond sliding a full 0.50 point, or 2.4%, to 19.95 on heavy volume of 12.7 million shares traded, compared to the three-month average running volume of 730,466 shares.

The 5.25% bonds closed down 0.25 point, or 1.4%, at 17.88; but the 4.50% bonds were down just 0.04 at 23.90.

GM shares lost $1.17, or 3.6%, to close at $31.31.

Ford's convertible preferred shares were down nearly 0.50 point at 38.58. Its shares closed down 22 cents, or 2.2%, at $9.71.

Maxtor, Human Genome

The convertibles of Maxtor retraced some of their early gains Monday when the Milpitas, Calif.-based hard disk company's 6.80% convertibles traded at 98.75, compared with a level of 98 bid, 98.50 offered on Friday. Later in the session the 6.80s traded at 97, according to trades reported by the NASD bond trace web site.

Maxtor's 2.375% issue traded at 91 early in the session versus a stock price of $4.50, according to a sellside desk analyst, and compared to a level seen Friday at 99.5 bid, 90 offered.

The company's shares closed down near their lows for the session at $4.37, down 10 cents, or 2.24%.

Human Genome Sciences Inc. saw its shares close better by 1% on Monday, with several of its convertible issues showing strength. Its new 2.25% convertible due 2012 traded at 97.5 versus a stock price of $13.30, and compared to 95.7 bid, 96 offered on Friday. The older 2.25% convertible due 2011 traded at 105.75 early in the session, compared to a level Friday at 103.5 bid, 104 offered.

Wesco, Cyberonics launch

Convertibles players didn't know price talk of the convertible offering launched by Wesco International, Inc. on Monday, but they knew that the 20-year convertible senior debentures are supposed to price after the close Thursday.

The convertibles have a call in year four and puts in years six, 10 and 15.

Bookrunners Goldman Sachs and Lehman Brothers were expected to have price talk Tuesday afternoon after getting a fix on a concurrent high-yield offering.

The Rule 114A deal for $150 of convertibles, plus a $25 million greenshoe, is being offered with an offering of $150 million of 12-year notes for a total of about $275 million to be raised by the Pittsburgh-based provider of electrical construction and maintenance products.

After the close, Cyberonics said it plans to price $125 million of seven-year convertibles talked to price at 2.50% to 3% for the coupon. Market sources said price talk for the initial conversion premium was 27.5% to 32.5%.

The Rule 144A deal, to be sold via bookrunner Merrill Lynch, has a greenshoe of $18.75 million and is expected to price Wednesday after the close.

The convertible senior subordinated notes are non-callable for seven years and there are no puts.

There is full dividend protection and takeover protection.

Cyberonics is a Houston-based medical device maker with a therapy for the treatment of epilepsy.

Also on the calendar is a roughly $900 million deal from Citigroup Funding Inc. that is exchangeable into shares of Genworth Financial Inc. The deal is expected to price Wednesday.

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