Ford slides as story sputters; GM weaker; deCODE Genetics widens; Teva steady despite loss to Forest

By Ronda Fears

Memphis, July 14 - For a summer Friday, convertible market sources said it was pretty busy with heavy selling in Ford Motor Co.'s preferred issue underscoring the day's action.

Other convertibles mentioned in play Friday, and all moving lower, were SanDisk Corp., Schlumberger Ltd., SuperValu, Inc., Vornado Realty Trust, Hasbro, Inc. and Nabors Industries Ltd.

Ford's convert got plenty of traffic Friday, but traders said the convertibles of General Motor Corp. were stalled even as the stock dropped sharply amid reports of a sharp decline in European auto sales while GM chief executive Rick Waggoner met in Detroit with the head of Nissan-Renault about a possible three-way alliance.

"We usually do a lot of business in the GM issues but we haven't seen anything today," said one sellsider.

Automakers Renault, Peugeot, Nissan and GM saw European sales slide in the first half of 2006 despite a 1.3% increase across the region, the European Automobile Manufacturers Association said Friday. Nissan sales plunged 14.9% as French carmaker Renault saw sales fall 9.4% while PSA Group SA - which makes Peugeot and Citroen cars - reported a 2.5% drop, and GM sales declined 2.4%. Higher in the Europe region were Fiat with a 20.1% increase and Volkswagen with a 7% gain.

"Sales fall again for GM [in Europe] and they want to merge with Renault with sales falling there too. What a mess! They get deeper and deeper in debt; why not follow the success of a successful company - Toyota."

With light volume and GM shares at $27.18, GM's 6.25% convertible due 2033 (NYSE: GPM) saw the biggest decline with a 0.47 -point loss, or 2.37%, at 19.40. On the same stock price, the 4.5% convertible due 2032 (NYSE: GXM) was unchanged at 24.59, while the 5.25% convertible due 2032 (NYSE: GBM) was easier by 0.05 point, or 0.27%, at 18.19. GM shares (NYSE:GM) ended down 85 cents, or 3.00%, at $27.47 on Friday, after a 4.39% drop on Thursday.

Ford issue skids by 1%

Ford's 6.5% convertible preferred (NYSE: F-PS), however, succumbed to selling pressure on Friday as Moody's cut the automaker's credit rating after Ford cut its common dividend and directors' pay by half. The convert had remained steady Thursday when the cuts were announced, despite a sharp drop in the underlying stock.

On heavy volume, the 6.5% convertible on Friday was off by 0.34 point, or 1.24%, at 27.10 with the underlying stock at $6.38. Ford shares (NYSE: F) closed down 18 cents, or 2.74%, at $6.38. On Thursday, the preferred spiked up after the cuts were announced but quickly returned to earlier levels and closed off just a tad while Ford stock fell 4.65%.

A sellside market source said that the exits in the convertible were not only related to an overall souring on the story but inferred that players felt the cut in the common dividend could jeopardize the dividend on the preferred, which is deferrable.

A buyside market source said the cuts at Ford were "a joke" in light of the magnitude of difficulties facing Ford and the auto industry.

"The quote of the day has to be, 'Ford is setting its own path. All of this is part of our strategy to become America's car company,' [says Cisco Codina, head of Ford's North American marketing, sales and service] What path is that? Down the tubes? I guess losing market share this year was all part of the plan. It must be nice to get paid and live in a fantasy world."

Dearborn, Mich.-based Ford on Thursday cut its third-quarter dividend to 5 cents a share on its class B shares and common stock, a move that could save it more than $90 million a quarter. The company also cut its board members' pay in half.

Moody's cut Ford's senior unsecured credit ratings to B2 from Ba3 and the senior unsecured rating of Ford Motor Credit Co. to Ba3 from Ba2, both with a negative outlook.

While Moody' cut Ford's credit on Friday, on Thursday S&P maintained a B+ rating saying the dividend cut did not immediately impact its credit standing.

GM track record weighs

The prospects of a General Motors alliance with Nissan-Renault was moreover seen as a less-than-stellar answer to the troubles it is facing, particularly in light of its track record.

Carlos Ghosn, who turned around Nissan and Renault as their chief executive, and GM chief executive Rick Wagoner were meeting in Detroit on Friday to discuss a possible alliance, but some analysts in equity circles were skeptical.

Standard & Poor's Equity Research analyst Efraim Levy said in a report Friday that while Nissan and Renault may have allied successfully, GM may be reluctant to enter into a new deal, given GM's track record of unsuccessful and costly partnerships. At best, he said the meeting gives Ghosn the opportunity to persuade Wagoner of the potential benefits of partnering.

The Wagoner-Ghosn meeting was first suggested two weeks ago by billionaire investor Kirk Kerkorian, GM's largest individual shareholder, as part of a plan to broker a deal in which Nissan and Renault would take a substantial stake in GM.

deCODE off in tandem with stock

Biotech concern deCODE Genetics, Inc. said Friday it will sell $30 million of common stock, or 6 million shares at $5 each, in a private placement to several institutional investors. The 12% discount from Thursday's close sent the stock reeling, and the convertible followed suit.

deCODE's 3.5% convertible bond due 2011 "widened out some," as one sellsider put it, trading at 73.5 versus a stock price of $5.10. deCODE shares (Nasdaq: DCGN) fell 48 cents, or 8.45%, to close at $5.20 on the day.

The biotech said net proceeds are expected to be $27.8 million. No use of proceeds was specified, but the company announced plans in late June to start new clinical trials for a heart drug it is working on.

"This is as much of a wake-up call as folks (investors in deCode) are going to get," said a buyside analyst.

"deCODE has missed earnings twice and has missed deadlines on DG031 horribly and repeatedly. Sure I had my head in the clouds too wishing that deCODE might one day accidentally change into a good company. However, today's sucker punch below the belt is a wakeup call for anybody.

"deCODE is an airplane in a death spiral heading straight to the ground. The pilot (CEO) has a blindfold on and is playing games in the cockpit. Meanwhile the bondholders/shareholder-passengers are holding hands with each other trying to assure each other everything is going to be all right. It's not going to be all right."

DG051 is deCODE's follow-on investigational compound for the prevention of heart attack. In late June, the company filed an Investigational New Drug application with the Food and Drug Administration and said, pending clearance, it expects to begin phase 1 clinical trials later this summer.

Teva steady on Lexapro loss

Another name from the health care area, Teva Pharmaceutical Industries Ltd., was steady to slightly firmer in the face of a loss to Forest Laboratories, Inc. in their patent dispute for Teva to make a generic version of Forest's antidepressant Lexapro.

Late Thursday, Forest said the U.S. District Court in Delaware ruled the patent on Lexapro was valid and infringed on by a generic version proposed by Teva. Forest shares (NYSE: FRX) surged $6, or 15.62%, to close at $44.40 and Teva gained instead of declining but one buyside onlooker said he was exiting the story on the strength.

"The generics game ain't what it used to be. The game has changed. People are better off in Big Pharma right now than generics," the biotech buysider said.

Teva's 1.75% convertible traded on the news at 91 with the underlying stock at $30.50. Teva shares (Nasdaq: TEVA) closed out the session down 1 cent at $30.50.

Market solid in tough week

Spanning the spectrum of industry sectors, convertibles had a tough week in the middle of July but most of the paper was "holding up OK," a sellside observer remarked Friday.

"It's been a tough week," he added.

Outright convertible players are solidly underwater, he noted, but the convertible arbitrage guys are not doing much better. He guessed that for July, at mid-month, was showing about a 1.5% decline for the outrights while arbs probably were seeing a 0.5% gain. Year to date, he estimated outrights are probably showing returns down by a little more than 3% as arbs are marking increases in the neighborhood of 6% to 7%.

"A lot of hedge guys have given back some of what they made in the first part of the year," he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.