GM convertibles soar on Kerkorian news; Lazard at bat; Ivax at 98.5; American Tower buyers seen

By Ronda Fears

Nashville, May 4 - Convertible buyers emerged Wednesday, at least in the outright strategy for the asset class. General Motors Corp. set the stage, with huge buying volume driving all three of those issues higher, and suppliers to GM like American Axle & Manufacturing Holdings Inc. went along for the ride, as did Ford Motor Co.

American Tower Corp. convertible holders liked its announcement Wednesday to acquire rival tower operator SpectraSite Inc. in a $3.1 billion all-stock deal, and traders said there were buyers for all those issues as they eased a tad on weakness in the underlying stock.

"Outright buyers seem to be coming out of the woodwork," said one sellside trader.

Another added, "Premiums are so low a lot of these names are probably popping up in results of database screens and sorts."

Premium contractions have crushed many convertible arbitrage players, though, so remarks from that corner of the market remain somewhat cautious.

"Until June 30 passes and we see where redemptions stand, no one wants to be a hero," said the manager of a small multi-strategy convertible player.

But there are mavericks among that set. One West Coast-based manager remarked, "What does Capt. Kirk always say? ... 'To boldly go where no man has gone before.' "

Outright players, though, are taking the reins in what some sellside traders say may be the beginning of the end of the market trough.

"Courage pays," another buysider commented. "We are finding good liquidity. The illiquid cases are rare...and unsurprising. The buying opportunity appears to be occasioned by the continued reduction in allocations to convertible arbitrage. No great insight on my part. Certainly in investing, going with the herd is unrewarding."

Primary action stilted

Peddlers for new paper, however, might beg to differ from the view of buyers emerging in the market, as signs of new deals struggling persist.

"In the aftermarket, exciting opportunities abound. Who needs new deals?" commented one of the players in a buying mood.

Ivax Corp.'s overnighter was cheapened as many onlookers expected would be necessary. The $350 million issue - with a 1.5% coupon and an 18% initial conversion premium - was reoffered at 98 by bookrunner Merrill Lynch, versus talk of a 99 to 100 reoffer price.

And the new Ivax convertible "had a tough time of it" in the immediate aftermarket, according to one buyside trader. In fact, several traders asked about the deal remarked that they didn't see it at all.

Lazard Ltd., the privately held French investment banking house run by Bruce Wasserstein, was at bat after Wednesday's closing bell with a $250 million mandatory pricing alongside its initial public offering.

There hasn't been much mention of the convertible - talked with a 6.25% to 6.75% dividend and 20% to 24% initial conversion premium - but the firm's split-rated 10-year bond offering was downsized and priced at 99.921 to yield 7.136% late in the day. The IPO is expected to price at $25 to $27 a share.

Athens-based shipping firm TOP Tankers Inc.'s $300 million perpetual convertible preferred - which was sweetened Tuesday by boosting the dividend to 5.875% to 6.0% from 5.625% to 5.875% and the initial conversion premium to 30% to 32.5% from 32.5% to 37.5% - was expected to price after Thursday's close.

GM convertibles zoom

Billionaire investor Kirk Kerkorian made a bid to more than double his stake in GM, from roughly 4% to 9% for $870 million or $31 a share, and that sparked a rally throughout the markets. A spike in the credit reversed course mid-afternoon, traders said, but the GM convertibles just kept tracking a higher beam.

"GM tightened and there were bids into the bonds, and then [the credit] came back a little," said a sellside trader.

A buyside source involved in the General Motors Acceptance Corp. credit default swaps said the paper came in around 45 basis points on the offer side. The GMAC five-year CDS were quoted by a sellside trader in early afternoon at 585 bps over Libor.

But the GM converts never skipped a beat, traders said. Amid very heavy volume, the GM 6.25% issue gained 1 point to 20, the 5.25% issue rose 0.625 point to 17.375 and the 4.5% issue added 0.5 point to 23.125.

GM shares also stayed on a northerly path during the session, settling the day $5.03 higher, a gain of 18.11%, to close at $32.80.

On news of Kerkorian's Tracinda Corp. making an offer to buy as many as 28 million shares of GM stock at $31.00 each, Merrill Lynch upped its rating on the stock.

"There is no doubt in our mind that Tracinda's interest is not in the auto business, but rather in unlocking value embedded in non-core businesses, including GMAC's non-auto subsidiaries," Merrill stock analyst John Casesa said in a report. "Given Kerkorian's successful track record of unlocking shareholder value, we feel we cannot continue to be a seller of GM and are therefore changing our rating to neutral."

Ford rode the wave higher, too, also with very heavy buying in those converts. The 6.5% preferreds gained 0.875 point to 40 on the news, while Ford shares added 69 cents on the day, or 7.29%, to end at $10.16.

Auto suppliers piggyback GM

Several auto parts companies and suppliers also participated in the GM party, but specifically mentioned in the convertible market was American Axle & Manufacturing as some 79% of its business goes to GM.

American Axle's 2% convertible was quoted up 2.25 points to 74.5 bid, 75.5 offered, with the stock soaring $1.39, or 7.07%, to close Wednesday at $21.06.

Like many other auto suppliers, American Axle has been on a downward track, pressured by the pain from less business as a result of sales shortfalls at the automakers.

Last Friday, American Axle reported first-quarter earnings of $13.3 million, or 26 cents a share, down from $36.5 million, or 66 cents a share in the year-earlier period due to lower production levels and higher material prices. Too, the company reduced its guidance for 2005 EPS to $1.40 to $1.55 a share from its prior forecast for $2.40 to $2.50. The company said it now sees production volumes for the major North American light truck programs to drop 15% versus a prior forecast for an 8% decline.

On the weaker earnings and dampened outlook, Standard & Poor's revised its outlook on American Axle's triple-B credit ratings to negative from stable.

American Tower issues easier

American Tower convertible holders like the SpectraSite deal, and traders said there were several adding to positions on weakness related to the dip in American Tower shares.

At the close, a sellside trader pegged the American Tower 3.25% convertible due 2010 at 149.5 bid, 150.5 offered, which would be off 3 points from Tuesday's close; he put the 3% convertible due 2012 at 101.5 bid, 102.5 offered, easier by about 1 point, and the 5% convert due 2010 at 97.5 bid, 98.5 offered, also off by about 1 point.

"We're in AMT, and consolidation among the tower companies is a wise response to the consolidation among the wireless carriers," said one convertible holder. "AMT is already the leader, and it's going to be a heavier gorilla now."

Boston-based American Tower is paying about a 9.5% buyout premium for SpectraSite, but by absorbing the Cary, N.C.-based company, it will boost the number of its wireless and broadcast antenna sites to 22,600 from 14,800 - advancing its lead over its nearest competitor, Crown Castle International Corp., which operates around 12,000 towers.

American Tower said the deal would create a company with more than $1 billion in annual sales and expects $400 million in annual savings. The deal is expected to close during the second half of 2005.

American Tower narrows loss

A nice earnings report form American Tower boosted the appeal of its securities, as well, traders said.

"The earnings were very nice, and that helped, too," a trader said. "They also upped their guidance for the year, even without adding in the SpectraSite transaction."

Also on Wednesday, the company reported a narrowed first-quarter net loss of $31.6 million, or 14 cents a share, compared with a year-earlier loss of $48.2 million, or 22 cents a share. Revenue for the quarter rose 9% to $184.4 million.

Looking ahead, American Tower forecast a second-quarter loss from continuing operations of $28 million to $26 million, or 12 cents to 11 cents a share. For the full year, it projected a loss from continuing operations of $87 million to $79 million, or 38 cents to 34 cents a share.

The earnings outlook did not include the SpectraSite acquisition, but American Tower said the combination was expected to lower leverage to the 4 to 6 times area and provide more financial flexibility.

Buybacks may be threatened

The sellside trader for American Tower convertibles said there is some concern that buybacks in those issues by the company may be slowed by the SpectraSite transaction, "but long term it seems this deal is still a positive" for holders of that paper.

In January, American Tower chief financial officer Bradley Singer anticipates having put another $40 million to $50 million of annual interest savings in place by the end of 2005, largely by "buying in our higher cost debt."

The company did $2 billion of refinancing in 2004, including buybacks in some of its convertibles, which gave it increased financial capacity and flexibility by extending maturities and a lower cost of capital. Those debt buybacks helped American Tower to nearly cut its leverage ratio of debt to EBITDA nearly in half last year from the peak of a whopping 12 times in 2002.

But, the trader pointed out that American Tower made no overtures about debt buybacks at all, even with regard to SpectraSite debt.

Spectrasite's old 6.75% due 2010 convertible bonds were erased when the company went in to bankruptcy in November 2002, but there were some convertible players dipping into a risk arb play in the stock on the American Tower news.

aQuantive premium contracts

aQuantive Inc. was used as an illustration of the outright opportunity because of premium contraction, although the sellside trader noted that the story has slipped through the market's screens apparently, as there has not been a lot of interest expressed in the name.

The aQuantive 2.25% convertible was seen Wednesday at 117 bid, 118 offered with the stock at $13.00, for terms of 2%, up 17%, the trader said.

"The premium really got crunched. Business seem likes it's OK - that's an understatement," he said. "These [converts] have both dividend and takeover protection, not that I care since I am [an] outright [holder]. I'm just not sure why the outright guys are not looking at them."

On the company's earnings Wednesday, the converts heartily participated in the spike in the underlying stock as a result of the news. aQuantive shares gained $1.91 on the day, or 17.85%, to close at $12.61.

The Seattle-based provider of digital marketing services posted first-quarter earnings of $6.4 million, or 9 cents a share, beating the First Call consensus by 4 cents, and raised its outlook for 2005 to an earnings per share range of 36 to 40 cents on revenue of $265 million to $275 million.

Primus sees arbs reach out

Although convertible arbitrage has been declared dead and there is a sense of massive withdrawals from the marketplace, sellside traders point out that those players still dominate the market. And, they also are finding opportunities, albeit in what was referred to as "unorthodox" areas such as extremely distressed bonds.

Primus Telecommunications Group Inc. was given as a specific example Wednesday.

"What happened today is that there was someone making a hedge bet on the situation, but just in the 3.75s. Those got a pop. The 5.75s are still in the mid-30s," a distressed trader said. "The [convertibles] do look pretty cheap, but unless they get some operating cash flow back, and soon, there won't be any 'maturity' on those bonds; they'll be worthless, and that's not a bargain."

The Primus 3.75% convertibles gained about 1.5 points to 26.5 bid on Wednesday, he said, from about 25 on Wednesday when the issue plunged into the teens before bouncing back. That issue had fallen into the 30s on Monday along with the 5.75% convertibles, where that issue has lingered.

Primus shares retreated Wednesday, losing 8 cents, or 8.89%, to close at 82 cents, after recovering on Tuesday a good amount of the dramatic plunge Monday after the company's earnings report.

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