Convertible market extends broad-based gains; autos, biotechs lift; Fannie Mae adds

By Rebecca Melvin

Princeton, N.J., Jan. 5 - For the third time this year - representing the number of sessions there have been this year - the convertibles market enjoyed broad-based buying, which continued to lift a diverse range of sectors, including names in the auto group that had been virtually dormant at the end of last year, traders and.

"You've got bids on auto stuff like AXL [American Axle & Manufacturing Holdings Inc.] that hadn't seen a bid in the Street for weeks," said the head trader at a Connecticut-based sellside shop. "It's buy orders seven or eight to one. There's very little for sale; and what is for sale is being offered above where the perceived market was last."

The only explanation being offered up for the market shift was money being put back to work, traders said.

"We're scratching our heads and taking advantage of the better bid environment. It's not only better bid, there's better volume as well," a New York-based sellside trader said.

Particularly surprising were the moves Thursday in many auto names. Ford Motor Co.'s convertible preferred shares charged up in the face of a Standard & Poor's downgrade.

The three $25 convertible bonds of General Motors Corp. were also higher, with a giant move for the 4.5% convertibles, which are the shorter-term bonds due March 2007.

"The whole group is better," the Connecticut trader said, adding that he sees the driver being money going back into the market, particularly money that was freed up after selling for tax purposes at the end of last year.

"If someone was getting into the market on speculation, the auto sector is a logical choice," he added.

Whether the shift is sustainable or not remained a question. "It is what it is, so might as well enjoy it while it lasts," a New York-based sellside trader said.

Other notable convertible market movers on Thursday were Emdeon Corp. and Fannie Mae. One trader also noted Laboratory Corp. of American Holdings and Watson Pharmaceuticals Inc., saying that any of the safer volatility plays, or names trading close to their bond floors or put price, were lifting in the positive tide.

"Names trading close to their bond floors or put price are the trades du jour," he said.

NRG launches

On the primary side, NRG Energy Inc. said Thursday that it plans to price $500 million of mandatory preferred convertibles, as well as $1 billion of common stock and $2.6 billion of unsecured notes during the week of Jan. 23.

Market sources said the target for the convertibles deal is Jan. 25.

Price talk for the Princeton, N.J.-based energy company's mandatories is for a yield of 5.75% to 6.25% with an initial conversion premium of 20% to 24%, according to a syndicate source.

The offering is being sold via joint bookrunners Citigroup Global Markets and Morgan Stanley.

Proceeds will be used to finance its previously announced acquisition of Texas Genco LLC.

Citigroup Global Markets was also a bookrunner for a $100 million issue of foreign currency convertible bonds for Indian issuer Larsen & Toubro Ltd.

The interesting aspect of this deal is that the bonds are denominated in Japanese yen. There have been a few non-Japanese issuers of yen convertibles, but the vast majority of Indian convertibles of late have been dollar denominated, market sources said.

One observed that doing the bond in yen is cheaper than doing it in dollars, while another said interest rates in Japan are lower, therefore the bonds have an extremely low yield to maturity.

Ford preferreds cruise higher

The 6.5% preferred shares of Ford jumped 3.6% in active trade, extending a 1.9% gain notched on Wednesday.

Buyers jumped in on the news, which was widely expected, of a downgrade. S&P said it lowered its corporate credit ratings on Ford, Ford Motor Credit Co. and all related entities to BB-/B-2 from BB+/B-1 and removed them from CreditWatch, where they were placed on Oct. 3 with negative implications.

The outlook is negative.

S&P said the reason for its downgrade was increased skepticism about the company's ability to turn around the performance of its North American automotive operations, a process that will require, at best, a number of years.

Even so, the agency cited Ford's still-substantial liquidity as a cushion against the risk of financial distress for the next few years. Nevertheless, the rating agency noted Ford is highly subject to the pricing actions of competitor General Motors (B/negative/B-3) and could suffer from further turmoil at GM.

On Wednesday Ford reported its December and full-year auto sale figures, which were lower but in line or better than expectations. For December, Ford sold 267,881 vehicles, down 9% compared with the year-earlier month; and for the year, it sold 3.17 million vehicles, which was down 5% from 2004.

The Ford preferreds closed at 29.66, up 1.04 point, or 3.63%. Ford shares added 34 cents, or 4.24%, to $8.35.

Among other auto paper higher on Thursday was Southfield, Mich.-based Lear Corp. 0% convertibles that ended at 44.25 bid, 44.50, compared with 43.5 on Wednesday. Lear shares closed down 48 cents, or 1.6%, to $29.25.

Fannie Mae bonds add 2 points

The 5.375% convertible preferreds of the Federal National Mortgage Association, or Fannie Mae, added about 2 points on Thursday as its underlying shares surged 9%.

The spike had to do with news reports that the investigator, who was hired by the mortgage finance giant to do an internal accounting probe, indicated he had discovered no new accounting problems, according to traders.

Later the investigator, former New Hampshire Republican Sen. Warren Rudman, disputed the conclusions drawn in a Bloomberg Business News story, according to the Associated Press. The AP reported that Rudman said his comments had to do with why the report was delayed, not with material subject matter of the report.

On Wednesday Rudman said he was still drafting parts of his report on Fannie Mae's multibillion-dollar accounting problems and was reviewing new documents in the case. But he said his legal team had the information it needed and indicated nothing had been uncovered that had not already been disclosed.

"I think we probably have most of what we need," Rudman said in the story, noting the final report could be delayed until February due to new documents.

The Bloomberg story interpreted his comments as "signs investigators have found no more mistakes" beyond the $10.8 billion in losses and several other less costly accounting errors the company and regulators have already acknowledged.

Bloomberg's report, which ran under the headline "Fannie Mae Investigation Finds Nothing 'Alarming'," said signs that investigators haven't found any more mistakes at Fannie "may help chief executive officer Daniel Mudd restore investor confidence following the biggest annual drop in Fannie Mae's share price since 1984."

Washington, D.C.-based Fannie Mae's 5.375% preferreds traded Thursday at 94, up from 92 to 92.375 on Wednesday, according to a New York-based sellside trader. Its shares closed at $53.18, up $4.43, or 9.1%.

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