GM, Ford convertibles slide after Delphi filing; American Axle holds up; Headwaters attracts interest

By Rebecca Melvin

Princeton, N.J., Oct. 10 - In the wake of a weekend bankruptcy filing by parts supplier Delphi Corp., convertibles in the automotive sector were weaker Monday, with General Motors Corp. and Ford Motor Co. sliding most noticeably, while other auto paper, including that of American Axle & Manufacturing Holdings Inc. and Lear Corp., was flat to slightly weaker, but relatively unhurt by the markets' initial response to the bankruptcy filing.

Also on Monday, Moody's Investors Service put General Motors on watch for a possible downgrade of its debt further into junk bond territory.

Taking the largest tumble were General Motors' 5.25% convertibles and its 6.25% convertibles, which slid 5.97% and 5.43%, respectively. GM shares plunged nearly 10%.

Ford Motor's 6.50% convertible preferred shares dropped 4.59%, while its common stock dropped 3.25%.

But a Connecticut-based buysider said the Delphi filing doesn't have a significant impact on the convertibles market, other than that it increases the likelihood that General Motors will cut or eliminate its common dividend, which would be a good thing for convertibles.

The convertibles of American Axle & Manufacturing were down just 0.50 point, while its shares sank 6%. Lear convertibles were little traded on a 3.4% drop in their underlying shares, traders said.

Meanwhile, Headwaters Inc., looked at as an alternative energy play, according to a New York-based trader, saw "good two-way interest," in its convertibles as its shares traded down in nearly double average daily volume.

Calpine Corp. and Mercury Interactive Corp. were also traded in the convertibles market, as were some energy names including Amerada Hess Corp., Schlumberger Ltd., and Halliburton Co., which were said to move in line with their underlying shares.

But with the bond markets closed in observance of Columbus Day, trading in convertibles was quieter than normal on Monday and concluded more quickly than usual at the end of the session, with few traders sticking around long after the stock markets' closing bell, according to sellside shop personnel.

GM, Ford slide after Delphi filing

The three $25 convertible bond issues of General Motors were lower, with the 4.50% holding up best, at just a 1.2% drop, after the world's largest carmaker saw its No. 1 auto parts supplier on Saturday file for Chapter 11 bankruptcy court protection.

Also on Monday, Moody's Investors Service placed General Motors' Ba2 senior unsecured rating and the Ba1 senior unsecured rating of General Motors Acceptance Corp. under review for a possible downgrade, with the rating agency citing concern that the potential pressure posed by the Chapter 11 bankruptcy filing, combined with continuing erosion in U.S. automotive market conditions, may severely constrain General Motors' ability to re-establish profitability and cash flow to adequate levels.

"This could make it less likely that GM will be able to successfully restructure its North American operations in a manner that preserves a business position and credit metrics supportive of a Ba2 rating," Moody's said.

Moody's said its review will focus on the company's ability to address challenges including potential risks resulting from the Delphi bankruptcy process, achieving meaningful reductions in its cost structure, including potential relief from the UAW on health care costs, stemming the decline in its U.S. market share, reducing employment levels and production capacity to better match its reduced share position in North America, contending with an increasing shift in consumer preference away from SUVs to smaller and more fuel efficient vehicles, and reducing its dependence on price incentives to prop up its sagging market share position in the U.S.

General Motors has indicated that it currently incurs a cost penalty of about $2 billion per year on North American supplies purchased from Delphi; and that a successful restructuring of Delphi could significantly reduce this cost penalty over the long-term.

Moody's said it will consider the potential savings, but also noted that near-term financial risks resulting from the Delphi filing could include Delphi rejecting individual General Motors supply contracts that are uneconomic as well as other risks.

Moody's also said that to preserve its Ba2 rating, General Motors will have to be able to maintain about 25% U.S. market share, earn automotive pretax profit in 2006 of more than $500 million, and meet other benchmarks

The downward moves in recent days in General Motors and Ford convertibles ahead of the filing weren't a new trend. For a second month in a row in September, the autos displayed stock price weakness, and consequently the auto-related convertible issues of GM and Ford were sold off, according to a Citigroup Convertible Market Monthly Snapshot, which was published Friday.

"Between the two, GM fared far worse during the month which saw its stock decline 10.5%, compared with Ford's 1.1% decline. While the weakness in GM stock and widening credit spreads caused the GM issues to decline for the month, we did see some investors continue to buy the GM issues, although some selling was seen during the month. Clients were doing the typical set-up with going long the GM convert, shorting the stock and buying credit default swaps," the Citigroup Snapshot said.

Of the $25 bonds that declined Monday, the 5.25%, which fell the most, as the issue with "the longest term and higher strike price, and therefore less optionality," a New York-based sellside analyst said.

The 5.25% lost 1.02 point, or 5.97%, to 16.07.

The 6.25% $25 bond has more equity sensitivity since it has a lower strike price of 47, the analyst said. That paper lost 1.04 point, or 5.43%, to 18.13.

Meanwhile the 4.50% paper, which is putable soon at 25, lost just 0.29 point, or 1.2%, to stand at 23.51.

"While these are not quite new boundaries; they are close," the analyst said, referring to the last time the 5.25% paper traded near these levels was on May 17, when it was 15.91.

"That was right before Kekorkian stepped in," the analyst said, referring to billionaire investor Kirk Kerkorian who boosted his holdings in GM to about 7.2%, up from 3.9%, after completing the purchase of 18.4 million shares.

On Monday the implied credit of the GM bonds had a spread of 900 basis points over Treasuries. And again, they had traded above that level before, when the implied spread was at 1,500 over Treasuries in May before Kekorkian stepped in. In June, the implied credit spread was at about 1,000, the analyst said.

American Axle eases slightly amid sector weakness

Other auto supplier convertible paper seemed little fazed by the Delphi filing.

The 2% convertibles of American Axle & Manufacturing traded at 81.50, off just 0.50 point from trades Friday at 82. However, shares of the Detroit-based company sank $1.39, or 6.3%, to $20.79.

American Axle saw its credit hold up because, while it is exposed to General Motors, it isn't exposed to Delphi, and the auto parts suppliers aren't exposed to each other, an analyst said.

American Axle sells 80% of its production to General Motors, but as long as the order flow for the company (axles) continues, that's what matters, the analyst said.

On Friday, American Axle shares added 1.2% after Calyon Securities raised its rating on the company to "buy" from "add."

Southfield, Mich.-based Lear Corp., which makes auto interiors, saw little activity in its 0% convertibles, traders said, but its shares lost $1.05, or 3.5%, to $30.33.

Headwaters attracts interest from convert players

The 2.875% convertibles of Headwaters traded Monday at 129 while its shares lost $1.20, or 3.42%, to $33.90 in heavy volume.

The natural resources and building materials company said Monday that it bought Michigan-based Max Manufacturing & Roofing LLC, a maker of synthetic roofing tiles and accessories in Albion, Mich. Terms of the acquisition weren't disclosed.

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