General Motors mixed on alliance talk; American Express slides; Health Management confirms new yield

By Kenneth Lim

Boston, July 5 - The convertible bond market continued to be quiet on Wednesday with many investors still away on vacation after the July 4th break.

General Motors Corp. had a mixed session as the market shrugged off reports that the company's board was meeting to discuss a proposed alliance with fellow auto makers Nissan Motor Co. Ltd. and Renault SA.

American Express Co.'s 1.85% convertible was down slightly outright as investors continue to set up the paper ahead of a December call date, but analysts say the security does not look cheap now.

Also seen in light trading on Wednesday was defense contractor L-3 Communications Holdings Inc., whose 3% convertible due 2035 was down slightly outright in line with a decline in the stock.

"Those 3s are trading today, but it's only a few trades, nothing unusual," a sellside trader said.

The L-3 convertible traded at about 97.25 against a stock price of $74.20, about half a point lower on an outright basis from the previous week. L-3 stock (NYSE: LLL) closed at $73.95, down by 1.56% or $1.17.

L-3 is a New York-based provider of electronic and communications systems for the defense industry.

Meanwhile, Health Management Associates Inc. slipped outright in line with its stock after a regulatory filing confirmed that it will pay a total of 4.375% a year on its 1.5% convertible due 2023 under an amended indenture for investors who do not put the notes before the Aug. 5, 2006 deadline.

Health Management on June 30 offered to pay 2.875% a year on the notes, but the market was unclear whether the company meant that it would pay the 2.875% on top of or instead of the existing 1.5% payment.

The convertible was quoted at 101.375 against a stock price of $19.75 on Wednesday, down by about an eighth of a point. Health Management stock (NYSE: HMA) closed at $19.79, down by 0.2% or 4 cents.

Health Management is a Naples, Fla.-based operator of acute-care and psychiatric hospitals.

The market overall had a subdued session on Wednesday, market sources said.

"It's dead," the sellside trader said. "There's nothing going on. I couldn't even make up something for you if I tried."

A buyside convertible bond trader said: "I hope this isn't a sign of a brutally slow summer coming up."

GM converts ignore alliance talks

General Motors had a mixed session on Wednesday as investors stayed on the sidelines amid reports that the company's board will discuss a proposed alliance with Nissan and Renault.

The company's shortest-dated convertible, the 4.5% paper due 2032 (NYSE: GXM), was up slightly by 0.04% or 0.01 point to close at 24.50. But the 5.25% convertible due 2032 (NYSE: GBM) declined 0.49% or 0.09 point to end at 18.45, while the 6.25% convertible due 2033 (NYSE: GPM) closed at 20.13, down by 0.4% or 0.08 point. General Motors stock (NYSE: GM) closed at $29.42, up by 0.03% or 1 cent.

General Motors said Wednesday that its directors will discuss at a meeting on July 7 the possibility of trying to join the Nissan-Renault alliance. Billionaire investor Kirk Kerkorian, who is General Motors' largest single investor, urged the Detroit auto maker last week to consider the partnership, adding that Nissan-Renault were interested in taking a minority stake in General Motors.

Nissan and Renault have given their chief executive, Carlos Ghosn, the green light to explore a three-way relationship.

An alliance could improve General Motors' credit, a convertible bond analyst said. But it is still too early to know if any alliance will be formed between the three car makers, and how such an alliance will be structured.

"It's all on paper, it's just people talking, it's not official yet," the analyst said. "The stock was obviously at a high last Friday, and it's traded in a range since Friday."

American Express not cheap before call

The American Express 1.85% convertible due 2033 was down slightly on an outright basis on Wednesday as investors set up positions ahead of a possible call in December, but the security does not look cheap now, analysts say.

The convertible was trading at 101.8 against a stock price of $53 on Wednesday, while American Express stock (NYSE: AXP) slid 1.89% or $1.01 to end at $52.50.

"It's pretty diverse in the market how to value these," a sellsider said. "The interesting thing is that they could model up pretty cheap...but it's hard to make an argument for them, you need the stock to go up to about $70 for this to break even."

A convertible bond analyst said the convertible could be seem interesting to some investors because American Express is an investment-grade credit and the paper has limited downside. There could also be upside "if American Express really takes off, but I don't really see that happening," the analyst added.

"It's a low-risk kind of idea," the analyst said. "The participation on the downside is pretty low, but you'd really need a pretty big jump in the stock for this to get meaningful."

"I understand why people might want to play this," the analyst said. "It's defensive, but it would be more interesting if it weren't at 102, if it were at par."

American Express is a New York-based credit services company.

Europe issuance cost soars in June

The cost of issuing a new convertible bond in Europe rose to its highest level in more than three years in June, said the convertible bond research team at Barclays Capital.

The Barclays Convertible Cost Index reached 3.71% in June, up by 39 basis points from May, on the back of higher swap rates and wider credit spreads, wrote analysts Luke Olsen, Haidje Rustau and Heather Beattie in a report.

The index represents the implied yield at issue on a hypothetical five-year, non-callable, euro BBB rated convertible bond with a 40% conversion premium and no stock-borrow costs.

The trend in Europe reflects similar moves in the United States. Yields and premiums of new convertibles issued in the United States moved in favor of investors in June, a Citigroup report recently noted, with the weighted average yield of a new deal at 3% with an initial conversion premium of 23.9%.

© 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.