AIG gains with boosted bailout, Medtronic adds; Nortel slides on quarterly loss; NRG Energy lower

By Rebecca Melvin

New York, Nov. 10 - News flow in several big names in the convertibles space did little to encourage much trading Monday, market sources said.

"It's quiet," an East Coast-based sellside trader said.

Nevertheless, the improvement in convertibles in the last 10 to 14 days relative to other asset classes continues despite the slight weakening of the last few sessions, sources said.

The improvement is attributed to the fact that many distressed, high-yield, cross-over type buyers, as well as equity buyers and multi-strategy hedge funds have entered the convertible market, and also due to the fact that many funds have suspended redemptions.

In that regard, the abatement in technical selling might resume at some point, one source pointed out. But he didn't foresee going back to the lows of October, unless the stock market falls apart again.

Of names in trade Monday, American International Group Inc. traded better, up 3 points, according to one sellsider, on news that the U.S. government boosted its bailout of the insurance giant amid evidence that the original package of September would not be sufficient to stabilize the New York-based company.

Medtronic Inc. was firm to slightly better on new data favorable to the medical device maker.

Nortel Networks Corp. was worse after reporting a $3.4 billion third-quarter loss, as well as job cuts and a management shakeup, amid a drop in sales for the network-equipment supplier and several large, one-time charges.

NRG Energy Inc.'s convertibles were also seen lower, although not reported in trade, after the Princeton, N.J.-based independent power producer formally rejected Exelon Corp.'s all-stock acquisition offer that came last month.

AIG adds on bailout boost

AIG's 8.5% mandatory convertible equity units due 2011 closed at $7 bid, $8 offered versus a share price of $2.28, compared to $5.7 versus a share price of $2.11 on Friday.

As recently as Sept. 9, the mandatories were a robust $50.75 versus a share price of $22.00. But by Sept. 26, after the initial government bailout, they were at $3.25; and on Oct. 15, the mandatory paper was languishing at $2.60.

Shares of AIG closed down 17 cents, or 8%, in heavy volume.

The government aid package was altered primarily to include a $40 billion injection of capital through the purchase of AIG perpetual preferred shares and warrants.

In addition, a previously granted bridge loan was reduced to $60 billion from $80 billion and the interest rate was also reduced to Libor plus 300 basis points, down from Libor plus 850 bps.

The fee on commitments not drawn upon was reduced to 0.75% from 8.5%, and the term of the bridge loan was extended to five years from two years.

AIG's agreements with the U.S. Treasury and the Federal Reserve were altered "to establish a durable capital structure" and "to resolve the liquidity issues AIG has experienced in its credit default swap portfolio and its U.S. securities lending program," a company news release said.

The revised plan depends on the government being able to convince holders of securities underlying AIG credit default swaps to sell them to the government, likely at a discount.

AIG nearly collapsed in September after being forced to post large amounts of collateral related to exposure to its credit default swaps. Many of these securities were linked to the performance of residential mortgages.

The government stepped in at that point with $85 billion in loan guarantees at Libor plus 850 bps, and the mandatories were at 6 versus a share price of $2.05 in the aftermath of that news.

Also on Monday, AIG posted a $24.47 billion loss, or $9.05 per diluted share, for the third quarter, compared to net income of $3.09 billion, or 19 cents per diluted share, in the third quarter of 2007.

The massive loss was blamed on financial dislocation in global markets, catastrophe losses and charges related to ongoing restructuring-related activities.

One sellsider said that the government's move to buy more assets made the mandatory paper "worthless" and he recommended selling them. But another sellsider said that he didn't think the preferred was worthless at all.

Medtronic adds

Medtronic's 1.5% convertibles due April 2011 closed at about 93.5, according to a New York-based sellsider, versus a share price of $40.15, compared to a previous close of 92 bid, 93 offered versus a share price of $39.81.

Medtronic's 1.625% convertibles due 2013 were seen closing at 88.5, compared to 87.5 bid, 88 offered.

During the session the 2011 paper, or the As, traded at 93, and the 2013 paper, or the Bs, traded at 88, both versus a share price of $39.75.

Shares of the Minneapolis-based medical device maker ended higher by 34 cents, or 0.85%, at $40.15, in light volume.

Medtronic reported new data showing that survival among patients with implantable cardioverter-defibrillators, or ICDs, treated only with anti tachycardia pacing was superior to patients who experienced at least one shock-treated episode. The findings further demonstrated the clinical benefit of ATP, Medtronic said.

Additionally, the analysis evaluating more than 2,000 patients found no link between inappropriate therapy and mortality, nor a causal relationship between ICD therapy.

Medtronic plans to report second fiscal quarter results on Nov. 18, the company said Monday.

Nortel sags on Q3 report

Nortel Networks' 1.75% convertible senior notes due 2012, the A paper, was reported on NASD Trace at 30.75, which was down about 10 points from Friday's close.

The Nortel Networks 2.125% convertible senior note due 2014 was seen closing at 33, compared to 35.6.

Shares of the Canadian telecommunications equipment company skidded 22 cents, or 19%, to $0.95.

Nortel's third-quarter loss of $3.41 billion, or $6.85 per share, reversed a year-ago profit of $27 million, or 5 cents a share.

The company said the result was due to economic turmoil and a large goodwill impairment charge.

The results included a noncash charge of $3.21 billion to write down goodwill and deferred tax assets. Excluding items, Nortel earned 30 cents per share in the latest quarter. Revenue fell 14% to $2.32 billion.

The company also announced plans to eliminate 1,300 positions, which is in addition to 1,200 positions eliminated as part of a previous restructuring plan.

In addition, the company's chief marketing officer, chief technology officer and global services president will be leaving the company.

NRG lower after nixing offer

NRG 5.75% mandatory convertible preferred shares due March 2009, with a par of $250, were seen closing at 198.5 versus a share price of $22.56 on Monday, compared to 204.5 versus a share price $23.86 on Friday.

The NRG 4% preferred shares were seen closing at 1,128.5, compared to 1,175.

Shares of NRG closed were down 5.5%.

The Oct. 19 unsolicited offer of Chicago-based Exelon to acquire all the outstanding shares of NRG at a fixed exchange ratio of 0.485 of an Exelon share for each NRG common share, or $6.2 billion in stock, was rejected unanimously by NRG's board of directors, NRG announced Sunday.

The main reason for the rejection, the company said, was that the offer undervalues NRG on an absolute basis as well as relative to the equity NRG shareholders would receive in the new company.

The currently offered exchange ratio would leave NRG shareholders owning 17% of the new combined company, but contributing 30% of the combined cash flows.

NRG also claimed that on a free cash flow yield basis, NRG shares currently yield 25%, which is more than three times that of Exelon.

Further, NRG cited Exelon's lack of firm financing in place to refinance NRG's debt, the majority of which has change-of-control provisions.

Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLP are financial advisers to NRG, and Kirkland & Ellis LLP is serving as legal counsel.

Mentioned in this article:

American International Group Inc. NYSE: AIG

Medtronic Inc. NYSE: MDT

Nortel Networks Corp. NYSE: NT

NRG Energy Inc. NYSE: NRG

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