Late rally lifts GM bonds, default swaps; energy drops, but Devon/Chevron bonds better; Nektar gains

By Rebecca Melvin

Princeton, N.J., Oct. 13 - A late-session rally in General Motors Corp. Thursday lifted the debt and credit default swaps of the automaker after they had slumped to new lows for the year earlier in the session.

The rally was sparked by news that the Detroit-based giant had made headway on negotiations with its United Auto Workers union on healthcare costs, as well as other positive developments this week, like stock purchases by billionaire investor Kirk Kerkorian, sources said.

Prior to Thursday, the bonds had dropped and the credit default swaps had widened dramatically on the heels of the bankruptcy filing by GM's primary parts supplier Delphi Corp.

"Pre-news GM [credit default swaps] were 975, and post news they were 930. Pre news GMAC was 530 or 540, and post news they were 500 to 515," a New York-based derivatives trader said of the late Thursday rally, quoting spreads on the various instruments. He said a story on Bloomberg saying that progress had been made with the UAW on healthcare was behind the moves.

Energy names on Thursday were weaker, however, with pressure on oil services companies like Halliburton Co. and Schlumberger Ltd. But Devon Energy/ChevronTexaco Corp.'s exchangeable bonds improved somewhat even as its shares fell, traders said.

Retailers, which have been hit in recent weeks amid concerns about a potential curtailment in consumer spending, were getting the once over from buyside convertible players.

And biotechnology company Nektar Therapeutics Inc. gained after the drug delivery system developer and Pfizer Inc. said a European advisory panel recommended that regulators approve their jointly developed Exubera inhalable insulin.

Meanwhile, a drought in new issuance persisted even as the New York area continued to be inundated with actual rain storms that started last weekend.

Details on NRG Energy Inc.'s planned package of debt and equity totaling $5.1 billion to help finance its $5.8 billion acquisition of Texas Genco LLC were not yet forthcoming. But it was confirmed that Morgan Stanley and Citigroup would be working together to bring various pieces to market, including very likely $500 million of mandatory convertibles, a syndicate source said. It is also possible that this piece of the financing will be a preferred convertible, however.

"Plans are changing. The company is trying to figure out the optimum capital structure and there are lots of determinants in that," said the source, who declined to comment further.

Late rally lifts GM convertibles, CDS and shares

The credit default swaps of General Motors bounced around Thursday, but in a clearly positive direction, cheered by positive GM-union news and developments of the last several days, sources said.

"I don't think a billionaire investor [in GM shares] is going to let a bunch of debt holders in front of him," a West Coast buysider said, referring to news Wednesday that investor Kirk Kerkorian raised his stake in the automaker to just under 10%, up from 9.5% to 9.7% in September.

"Until he starts selling stock, I don't think there's much to worry about. Pricing at 940 over when a billionaire is buying equity is irrational," the buysider said.

Prior to the news some of GM's convertible debt had pushed back into positive territory, but after the news all three bonds were solidly higher.

The Delphi bankruptcy, GM's financial liabilities related to retiree benefits and other potential fallout in the auto sector were part of what was weighing down the entire credit market, sources said. But the possibility of higher interest rates and inflation were also contributing to re-pricing in the credit markets, sources said.

Investors are eyeing new consumer price index data expected to be released Friday. "We're looking to see if there's a seep through of energy prices to core CPI, and if that's confirmed, then bonds go lower than they already are," said the West Coast buysider, who added that the response should be tempered by the fact "that in a world with India and China, the world's a bigger place than it was and there is a lot of capacity."

A morning report from CreditSights had forecast that in the situation with Delphi "much depends on the business/labor battle as industry restructuring continues."

CreditSights said that the Delphi bankruptcy will affect the auto industry more than the downgrading of General Motors Corp. to junk earlier this year, but how broadly it will affect the financial markets remains to be seen.

"Rating constrained investors could be forced to unwind trades that would inject selling pressure on a broad range of names in the market," the report written by analyst Louise Purtle stated.

"There is no denying that there have been an expansion in demand and a level of economic growth in the last two years that has enabled companies to at least partially offset these cost pressures, but we believe the high-yield market's current trading levels are more reflective of the continued influence of a low yield rate environment and a sideways' trading stock market that ensure a strong technical bid for high yield assets than a statement about improving fundamentals at these most levered of companies," Purtle said.

"And it would well be the case that Delphi's bankruptcy becomes yet another event that had the potential to rile the market but ultimately did not do so," Purtle said.

The 4.50% GM convertible bonds, which were mostly higher all day, gained 0.26 point, or 1.14%, to close at 23.07. The 5.25s, which were mostly lower throughout the session, turned positive by 0.25, or 1.57%, in the last 15 minutes of the day, to close at 16.21. And the 6.25% convertibles, which had been solidly lower during the session, also climbed by 0.14, or 0.77%, to a higher close of 18.25.

GM shares gained 45 cents, or 1.69%, to $27.15.

© 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.