GM convertibles travel up on UAW pact; Ford rides GM wave higher; Lucent issues eyed on stock rise

By Ronda Fears

Nashville, Oct. 17 - Convertible traffic Monday was dominated by General Motors Corp., which posted about $3 billion in losses so far this year, as the company struck a tentative agreement with the United Auto Workers that will cut health care costs and said it is looking to possibly sell its finance arm, General Motors Acceptance Corp.

GM bonds were seen Monday up around 4 points on the news of the day, with the 8.375% notes due 2033 closing in the 78 bid, 79 offered area. Of note, GM capital structure perspectives will be the focus of a Lehman Brothers conference call Tuesday at 10:30 a.m. ET hosted by auto analyst Darren Kimball, convertible analyst Venu Krishna and fixed-income analyst Jean Lantz.

Lucent Technologies Inc. was another name mentioned by traders, who noted calls of inquiry but little volume in the convertibles. Lucent shares rose about 4% on a Lehman report, which sparked interest in the convertibles. Other mentionables were the new Citigroup/Genworth Financial exchangeable - trading at 30.7 with the stock at $31.10 - and Yahoo! Inc.'s zero-coupon convert - at 168 with the stock at $34.

Memory chip maker Rambus Inc. moved up sharply after the close on reporting a nice boost to earnings, and a convertible sellsider noted that the company had bought back only $105 million or so of its zero-coupon convertible issue. That alleviated some call risk on it and might allow the bonds to participate in the stock rise. Rambus posted third-quarter net income of $14.5 million, or 14 cents a share, up from $10.4 million, or 10 cents a share, a year ago, while revenue fell to $36 million from $38.8 million.

Rambus shares closed Monday off 6 cents, or 0.51%, at $11.60 but were seen in after-hours trade up by 54 cents, or 4.66%, to $12.14.

In general, there are some tangible signs that hedge funds are getting healthier, with the CSFB/Tremont hedge fund index showing Monday a gain of 1.6% for September, pushing it up 5.9% so far this year. Convertible arbitrage held its own as a sub-index for the month, too, with a 1.1% gain for September but is still in the red for the year with a year-to-date decline of 3%.

IPG deal structure debated

Also after the close, Interpublic Group of Cos. Inc. launched a $500 million perpetual convertible preferred with price talk putting the dividend at 5.25% to 5.75% and initial conversion premium at 25% to 30% for Tuesday's business.

The New York-based advertising agency said proceeds would be used for general corporate purposes.

"The management team said on a recent call that they were looking at raising capital, so it's not a big surprise," said one buyside market source. "The good news for the bonds is that it's in the form of a preferred."

But, another said it would have been better as a mandatory.

"I think they made a big mistake doing this as a perpetual preferred," the latter buysider said. "They should be issuing a mandatory preferred and sacrifice some upfront yield and premium in exchange for a guarantee that the thing converts in three years. This company has problems and a mandatory would have given them better equity 'credit' with the rating agencies."

In addition to the now-standard dividend and takeover protection provisions, the prospectus for the issue also states that failure to file documents with the SEC within 15 days after the required date of filing will result in a 1% annual penalty, until the reports are filed.

Interpublic is one of the many late filers that have been a thorn in the sides of convertible players. But, also like several other cases, holders have been able to negotiate a "cash kiss" from the company in order to forestall the acceleration of the issues, or default in some cases. In June the company agreed to pony up another 12.5 basis points of interest to holders of its convertibles who consent to waivers because of the late filing, bringing the total smack so far to 50 bps.

On Monday, Interpublic shares ended off 9 cents, or 0.81%, at $11.01.

GM convertibles gain

GM issues were revved up Monday after the leading automaker posted a steep third-quarter loss but said it reached a deal with the UAW to cut health-care and retiree costs by billions. The giant automaker also said it is looking to sell a controlling interest in GMAC.

The GM convertibles were the most active issues in the market Monday, with the 6.25% issue adding roughly 1 point to 19.5. That issue is most popular among hedged players and saw volume four times the average. The 5.25% issue also is played heavily by convert arbs and gained nearly 1 point to about 17.5 on volume twice the norm. The 4.5% convertible, which is mostly held by outright funds, added about 0.375 point to around 23.625, and it too saw heavy volume on the news.

GM chief financial officer John Devine said the tentative agreement on health care would reduce GM's retiree health care liabilities by about 25%, or $15 billion, over a seven-year period. It would cut annual employee health care expenses by about $3 billion on a pretax basis with cash savings estimated at around $1 billion a year.

Meanwhile, early Monday, Detroit-based GM reported a net loss of $1.6 billion, or $2.89 a share, compared with a profit of $315 million, or 56 cents a share, a year before, while revenue rose 5% to $47.2 billion from $44.9 billion a year ago, well ahead of First Call analysts' expectations of $35.14 billion.

More cuts seen down the line

Yet, GM expects to reduce its costs for plants and employees by $5 billion by late 2006, GM chief executive Rick Wagoner said. In addition, GM wants to reduce its materials costs by $1 billion next year by using lower-cost suppliers.

GM said it will need to close more assembly and component plants, cutting about 25,000 jobs, or 8% of its workforce, by 2008. The immediate impact on earnings in 2006 depends on the approval of the health-care changes, company officials said.

"These actions represent an acceleration of the pace and scope of our North American turnaround plan," said Wagoner.

GM has already cut headcount by 30% in the past five years.

Analyst applauds GMAC sale

GM said it's also exploring the sale of GMAC to an unnamed "strategic partner" to restore the unit's investment-grade rating and that move was at least praised by some credit analysts. The GMAC ratings were put on evolving watch by Standard & Poor's Corp.

"We think it's important for us to address it [the GMAC/GM connection] and address with it some bold actions, and that's what we're looking at," said Devine in a conference call.

GM did not detail who potential suitors might be, however.

GMAC posted third-quarter net income of $675 million, up from $620 million in the 2004 period, reflecting strong results in mortgage operations that offset lower earnings from vehicle financing and a decline in insurance earnings.

"A possible sale of 'controlling stake' in GMAC is a major positive for GMAC and will require GM's auto operations to stand on its own two feet by 2007," said CreditSights analyst Glenn Reynolds in a report Monday.

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