Convertible market sees broad-based gains, GM, Ford lift; airlines better, Calpine adds points

By Rebecca Melvin

Princeton, N.J., Jan. 4 - The convertible bond market was generally healthier on Wednesday with buyers seen virtually "across the board" in sectors including autos, airlines, energy and biotechnology, traders said.

In autos, the $25 convertible bonds of General Motors Corp. found buyers and Lear Corp.'s 0% convertibles were better, as were Ford Motor Co.'s convertible preferred shares, which gained 1.9%.

In airlines, the 4.25% convertibles of AMR Corp., parent of American Airlines, gained about 2 to 3 points outright. JetBlue Airlines Corp., which dropped on Tuesday following a downgrade of its underlying stock, found its footing on Wednesday, with the 3.5% convertibles trading at about 89.

In biotechnology, Frazer, Pa.-based Cephalon Inc. saw its most actively traded convertibles, the 2s, and both zero-coupon A and B tranches, extend gains, up slightly mostly in line with its shares.

Other notable names in trade on Wednesday were Freeport-McMoRan Copper & Gold Inc. and Calpine Corp., which has once again become a market focus due to settlement of the Chapter 11 power producer's credit default swap derivatives.

News that Teva Pharmaceuticals Ltd. decided to decline the "public acquirer fundamental change option" for IVAX Corp.'s 1.5% convertible senior notes due 2025 was "expected," according to a New York-based sellside trader, and since most of that issue had already been converted, the final decision didn't have much of an impact.

Teva had previously said Dec. 6 that it expected not to exercise the option and instead pay a make-whole premium. The 1.5% convertibles due 2025 were the only bonds with the public acquirer clause.

The other IVAX bonds, including the 1.5% convertibles due 2024 and the 1.875% convertibles due 2024, have also already mostly been converted, the trader said.

But the IVAX 4.5% convertible bonds due 2008 traded Wednesday at 101. And "they will probably remain outstanding," the trader said. "They have a parity of only 98, and people are probably not going to convert them and not going to put them either, as they are trading above the put price."

One bond that has reversed course recently was EDO Corp.'s 4% convertibles due 2025. They were slightly lower, but flat on a dollar neutral basis. The notes, which priced Nov. 16, traded Wednesday at 100.5, versus a share price of $26.375.

Shares of the New York-based defense contractor closed at nearly the same level at $26.50, which was down 58 cents, or 2.4%, on the day.

One trader said defense names have been weaker in recent days due to planned troop reductions in Iraq. "It's probably not going to affect these kinds of companies," the trader surmised of the troop reductions. "But sentiment has turned against them."

Retail was another sector that has quieted down, the trader said. "It's not really a focus now that the holiday season is over, although the gift card effect has not totally fallen out yet," he said.

Overall, however, "It felt better, with buyers across the board as people looked ready to put money to work," a New York-based sellside trader said.

Ford preferreds gain

The 6.5% preferred shares of Ford Motor trended up in active trading on Wednesday, with 2 million shares changing hands, or double the three-month average volume.

Early in the session, the preferreds traded at 28.15 versus a share price of $7.92. They ended higher at 28.62, versus a closing share price of $8.01.

At midday, Ford reported that its December U.S. sales fell 9%, compared to a year ago, at 267,881 vehicles sold. For full-year 2005, U.S. sales were off 5% at 3.17 million vehicles sold. But this decline was not as bad as expected.

By brand, Ford's Volvo and Jaguar posted the biggest drops in sales in December, at negative 28.4% and negative 25.6%, respectively. Land Rover was its only brand to post a gain in December.

The Dearborn, Mich.-based automaker emphasized in its release that car sales actually climbed in 2005 for the first time since 1999. Yet even that positive news pointed to the fact that the sport utility vehicles segment, which has supported performance in recent years, is a slumping business.

Ford said it will unveil restructuring plans aimed at restoring profitability on Jan. 23, when it hosts its fourth-quarter earnings and fixed-income conference calls. The company's last restructuring effort was four years ago, when the company cut 35,000 jobs and closed five plants.

In November, GM announced plans to slash 30,000 manufacturing jobs and close 12 North American plants over the next several years.

GM's sales figures were similar to Ford's. Its U.S. sales of new trucks and cars in December totaled 392,041, down 10% from the same month a year ago. Car sales were down 19% and truck sales were off 5%.

For the calendar year, sales were 4.52 million, down 4%, with car sales off 7% and truck deliveries down 2%.

But the company's stock and bonds posted respectable gains. The 5.25% convertibles added 0.25 point, or 1.7%, to 14.90 and the 6.25% bonds gained a third of a point, or 2.2%, to 15.65, while the 4.5% convertibles edged up slightly, or 0.2%, to 20.95.

GM shares gained 51 cents, or 2.7%, to $19.41.

Freeport-McMoRan preferreds gain

The 5.5% convertible perpetual preferreds of Freeport-McMoRan gained Wednesday, with an early trade reported at 1240 versus a stock price of $56.60, after the gold and copper producer declared dividends, as expected.

For holders of record as of Jan. 17, the New Orleans-based company will pay $13.75 per share of its 5.5% preferreds and $0.3125 per share of common stock.

The 7% Freeport-McMoRan convertibles due 2011, which aren't dividend protected, weren't seen in trade, but were indicated at 195 bid, 196 offered Wednesday, according to one New York sellside shop.

"I don't know why it's up so much. The dividend was expected. Maybe someone knows something; maybe they struck a vein somewhere," a Connecticut-based sellside analyst half kidded.

Shares of the company were up $3.27, or 5.8%, to $59.75.

Calpine gains another point

The 6% and 4.75% convertibles of Calpine Corp. gained 1 to 1.5 points on Wednesday, extending gains from Monday, as buyers try to snap up bonds to deliver to settle CDS contracts.

The 6s traded at about 22 and the 4.75s at 28, according to a Connecticut-based sellside trader. The shares are no longer traded on the New York Stock Exchange, but over the counter and were up 1.9 cents, or 9%, at $0.226.

Since the San Jose, Calif.-based power producer entered Chapter 11 bankruptcy protection from creditors on Dec. 20, the convertible bonds have gained about 5 to 10 points, the trader said.

The firming trend is related to the large number of credit default swap contracts that have to be settled, and once they are settled, the convertible paper will weaken. It's not fundamental, the trader said. His firm predicts that the gains will be retraced by Jan. 17, which is when many of the contracts will have been settled.

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