GM off as anxiety driven up; Apria sells off on sale chatter; Fairchild up on refi headlines

By Ronda Fears

Nashville, July 29 - General Motors Corp. saw a huge selloff in its convertibles as high vehicle inventory levels prompted a downgrade in the stock, driving anxiety levels up among convertible holders who had already been worried about the impact of potential new accounting rules regarding dilution from the contingent convertibles.

Although a convertible fund manger out west bemoaned the lack of time to really look at fresh ideas, there was a new deal afloat in the overnight market from Century Aluminum Co. The small $150 million offering is among the trickle of deal flow seen in the past month.

Most telecom issues were higher at the close Thursday, but traders were preparing for a wholesale slide in that group after Moody's Investors Service cut AT&T Corp.'s debt to junk. The move came after the one-time top phone company posted an 80% drop in profits and its 18th straight quarterly sales decline. In the high-yield market, AT&T bonds were heard to have widened out by 20 basis points on the downgrade.

While earnings were still keeping many players busy, merger news and restructuring or refinancing speculation was the source of a great deal of activity in the convertible universe on Thursday, however.

Cooper Cos. Inc. was higher on the heels of its announced $1.2 billion cash and stock offer for contact lens specialist Ocular Sciences Inc. Apria Healthcare Group Inc., however, was sold off sharply on a report asserting the company is exploring the possible sale of the company, which the company denied.

Fairchild Semiconductor Corp. also was higher on headlines that the company is looking to buy back or refinance debt to lower interest costs.

Elsewhere, GTech Holdings Corp. slid sharply on a $650 million lawsuit filed against it by the Brazilian government over alleged briberies related to the company's lottery contracts in that South American country, which also was the source of a Securities and Exchange Commission subpoena for documents from the company.

Century Aluminum full-press

Century Aluminum was in a full-press marketing effort after Thursday's close, pitching in the overnight market $150 million of 20-year convertible notes talked to yield 1.75% with a 23% to 28% initial conversion premium.

While the issue doesn't have any contingent conversion language, market sources said there is a provision for a net share settlement, which is a means to limit the dilutive impact.

Monterey, Calif.-based Century intends to use the proceeds, together with proceeds from a planned private placement of senior unsecured debt, to fund a tender offer and consent solicitation for any or all of its outstanding 11.75% senior secured first mortgage notes.

Proceeds also may be used for general corporate purposes that could include acquisitions and a planned expansion of Century Aluminum's Nordural facility, which was acquired in late April, the company said.

After the market close Wednesday, Century Aluminum reported net income of $18.3 million, or 60 cents a share fully diluted, for second quarter, reversing a net loss of $5.0 million, or 26 cents a share fully diluted, in second quarter 2003.

With aluminum prices the highest in nine years, total sales were $263.7 million, up from $196.2 million a year before. The company recorded an 11-fold increase in second-quarter operating income to $41.2 million from $3.7 million a year before.

Century Aluminum stock closed Thursday up $1.11, or 4.66%, to $24.92 but was down in after-hours trading 92 cents, or 3.69%, on the convertible news.

GM anxiety compounding

GM had already come under pressure from the possible dilutive impact of new CoCo accounting rules, not to mention falling market share, ongoing and elevated incentive programs amid lackluster sales. But the selling pressure gained steam Thursday on two high-profile equity analysts expressing concern about high inventories of unsold vehicles.

The three GM convertibles, very liquid $25 par bonds, were lower by 0.375 to 0.5 points in very heavy volume. The 6.25s were pegged at the close at 27.875 bid, 28.375 offered, the 5.25s at 24.25 bid, 24.75 offered, and the 4.5s at 25.5 bid, 26 offered.

Similarly, GM shares fell $1.37, or 3.11%, to $42.75.

Equity analysts at Goldman Sachs and Lehman Brothers cut their ratings and earnings outlook for GM, saying the top U.S. automaker will have to cut vehicle production sharply next year, if not sooner, and may still miss 2004 and/or 2005 earnings targets by a wide margin.

Ongoing sales incentives are a particular concern, said a buyside trader holding GM paper.

"They may have to keep these incentives going just to reduce inventory, give away vehicles, that is," he said.

"People who buy GM cars are pretty much strapped because of high debt levels and the slow start, or false start, to the economic recovery. How many people do you know who make over $200,000 buy a GM car. Except for the Suburban, which isn't selling like it used to, people making that kind of income are buying Mercedes, Infinity, Audi, the high-end vehicles. I mean, there's a waiting list for the [Chrysler station wagon] Magnum."

In addition to the inventory concerns and the dilution impact from the CoCo converts, GM still faces pension liabilities, which is estimated in the area of $900 million.

Cooper seen up 1.75-2 points

After the close Wednesday, Cooper said it will pay $1.2 billion in cash and stock for contact lens specialist Ocular Sciences. Cooper, a health-care device company that also makes contact lenses, will offer $600 million in cash and issue 10.3 million shares, making the offer is worth about $44 per Ocular Science share, or an 18% premium from the stock price Tuesday.

Despite the heft premium, the Cooper convertibles rose in tandem with its stock on the news. A sellside trader said that the gain in market share was considered to outweigh the "pricey price tag" of the acquisition.

Cooper's 2.625% convertible added 1.75 to 2 points, the dealer said, closing Thursday at 143 bid, 143.5 offered. The underlying stock gained 77 cents, or 1.36%, to $57.30.

Cooper said the deal should close in fiscal first quarter, beginning Nov. 1, and will be accretive to fiscal 2005 results. The company expects the combined company to show revenues of $930 million to $943 million in fiscal 2005 and $1.04 billion to $1.05 billion in fiscal 2006. Earnings in fiscal 2005 are projected at $3.25 to $3.35 per share, and $4.20 to $4.30 in fiscal 2006.

"S&P's 2005 estimate without Ocular was $3.07," the trader said, "so there is an immediate jump in earnings, and an acceleration of growth going forward."

Apria sale buzz bad medicine

Apria Healthcare convertibles sputtered and gasped lower on a New York Post article speculating on the sale of the company, and although the company denied the rumors, the market was selling the rumor. Traders also noted that Apria is scheduled to report earnings early Friday, with a conference call at 10:15 a.m. ET.

"You just can't afford to hang on if there's a big surprise like this looming out there," said a buyside trader, noting a lot of the gain in the stock was short covering.

The stock was halted for a time, but when it resumed trading, it shot up like a rocket. The convertibles, however, fell like a rock.

Apria shares ended up $2.75, or 10.16%, to $29.81.

The 3.375% convertibles dropped to an offer of 107.25 late in the day, according to a market source on the sellside. Another sellside market source pegged the bonds down by as much as 2.5 points.

The New York Post reported that Apria Healthcare, which provides respiratory therapy and home medical equipment, is considering a sale of the company, saying the company has met with the likes of Blackstone Group, Warburg Pincus, Madison Dearborn Partners and others about buying the company and taking it private. According to the article, Banc of America Securities has been hired to advise Apria.

As a matter of policy Apria does not comment on rumors and speculation concerning possible transactions involving the company, but an exception was made in this case.

"Apria does receive inquiries from time to time concerning the possible acquisition of the company, and in the exercise of their fiduciary duty Apria's board of directors considers, from time to time, whether the best interests of stockholders would be served by pursuing such a transaction," the company said in a prepared statement.

"At this time, there is no transaction pending and Apria is not engaged in any effort looking to, or negotiations with any party concerning, a sale of the company."

GTech slides on probe, lawsuit

GTech convertibles lost 5.75 points, or about 3 points on swap, a dealer said, after the company revealed it was being sued by the Brazilian government and had been subpoenaed by the SEC regarding its previously disclosed controversy regarding alleged bribes related to its lottery contract in Brazil.

The GTech 1.75% converts were quoted closing at 155.75 bid, 156.25 offered. The underlying stock ended down 81 cents, or 1.88%, to $42.25.

GTech first disclosed the matter in May, saying there were accusations of bribes to influence the extension of its contract to run Brazil's national lottery, and said Thursday that it has been conducting its own internal review and "is confident that it acted appropriately and GTech's compliance program worked as it is intended."

The Brazilian government is suing GTech for $650 million, but the company said it "believes that the services were provided under valid and enforceable contracts and as such does not anticipate material liabilities to result from this claim.

According to GTech's 10-K filing, the Brazil lottery contract accounts for 10% of its revenues.

Fairchild ponders refinancing

On Thursday, a Bloomberg report quoted Fairchild chief financial officer Matthew Towse saying the company may use some of its cash to reduce debt and lower its interest expense, and that was enough to give a further boost in the convertibles, which had been getting a considerable amount of attention this week from bargain-hunters scouring the busted universe.

Fairchild ended second quarter with $660 million in cash and equivalents. In addition to the $200 million convertible, the company's debtload includes $350 million of 10.5% straight bonds due 2009 and $300 million of secured bank debt.

The 5% convertible due 2008 is callable in November 2004 at 102.25.

On Thursday, the convertible closed at 99.875 bid, up from a trade early in the day at 99.125 and up from 98.5 a couple of days ago.

Fairchild shares ended Thursday up $1.06, or 7.98%, at $14.35.

© 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.