GM, Nabors slide despite positive news; Citadel gains from speculation; Pier 1 to price new deal

By Kenneth Lim

Boston, Feb. 7 - The convertibles market had a few surprises on Tuesday, with investors harshly greeting General Motors Corp.'s dividend cut and Nabors Industries Ltd.'s consensus-beating results.

Convertibles fell together with their stock as analysts suggested that the positive news was not enough at both companies.

Meanwhile, Citadel Broadcasting Corp.'s 1.875% convertibles due 2011 gained about 6 points after the company said it was merging with Walt Disney Co.'s ABC Radio network, according to a sell-side analyst.

In primary news, Pier 1 Imports Inc. plans to price $150 million of 30-year convertibles on Wednesday. Buy-side sources say talk guides for a 6.375%-6.875% coupon and an initial conversion premium of 30-35%.

GM's dividend cuts fail to spark converts

General Motors' 4.5% convertible (NYSE: GXM) due 2032 was seen trading lower by 0.32 point, or 1.36%, at 23.23 against a $22.64 stock price in the afternoon. The least equity sensitive 5.25% convertibles due 2032 (NYSE: GBM) changed hands at about 16.34, down 1.57% or 0.26 point, against the same stock price. The most equity sensitive of General Motors' convertibles, the 6.25% notes due 2033 (NYSE: GPM), traded at about 17.60, 2.22% or 0.4 point lower than the previous close. The GXM convertibles closed at 23.20, or 1.49% down, while the 5.25% GBM convertibles ended at 16.34, down 1.57%. The GPM convertibles closed 2.33% lower at 17.58. General Motors stock (NYSE: GM) closed at $22.81 on Tuesday, down 53 cents or 2.27%.

The 8% bonds due 2031 of General Motors Acceptance Corp., the parent's finance arm, also lost their early gains and closed lower by about three points around 96.

Observers had expected the Detroit auto maker's credit to benefit from an announcement early Tuesday that it would halve its dividend payout to $1 a year and cut salaries and benefits. The move came after Jerome York, a top aide to billionaire investor Kirk Kerkorian, was elected to General Motors' board. York is a consultant to Kerkorian's investment firm, Tracinda Corp., which is the car maker's third-largest shareholder, and had urged similar actions last month to improve the company's profitability.

"It's almost like the converts are unchanged, which is a bit surprising," said a sell-side analyst. "In terms of valuation, the converts are a lot more attractive today than yesterday."

But the same analyst, who estimated that the 5.25% convertibles could have a half-point theoretical improvement, while the 6.25% convertibles could benefit 1.30 point, felt that the cuts could have been offset by uncertainty over General Motors' plans to sell GMAC, its financing arm. Citigroup and Wachovia Corp. have been named as major banks that have made offers for GMAC, but any deal remains a matter of speculation. General Motors is also enmeshed in labor talks with the United Auto Workers union and former subsidiary Delphi Corp., which could also affect its balance sheet later.

With such concerns weighing on the company, another analyst said the dividend cuts may not have had a significant impact on General Motors' credit. "A dividend cut is not necessarily a huge impact to the credit matrix, and as much as that goes, it may not have been as huge a credit benefit as people have been anticipating," the analyst said.

The ratings agencies were also unmoved by the cuts. Moody's Investors Service said it was keeping its B1 rating of General Motors and Ba1 rating of GMAC under review for possible downgrade. Although Moody's viewed Tuesday's cuts as "constructive," it said "the likely near term impact of these actions is not considered to be of sufficient magnitude to offset the concerns cited in the pending review."

Standard and Poor's and Fitch Ratings also maintained negative views of General Motors' credit.

Nabors, Chesapeake slide on oil concerns

Nabors, a Bermuda-registered land drilling contractor, saw its 0% convertibles due 2023 lose about 6.5 points on Tuesday after its fourth-quarter earnings growth was overshadowed by an industry-wide sell off and a downgrade by Merrill Lynch. The convertible was bid at 118.24 and asked at 118.49 against a $75.11 stock on Tuesday. It was at 124.7 bid, 124.95 asked versus $81.20 the day before. An analyst said that although the convertibles lost on an outright basis, they were holding steady on a dollar neutral basis.

"The bonds held up but the stock got smacked," the analyst said. Shares of Nabors (NYSE: NBR) lost 7.5% or $6.09 over the session to end at $75.11.

Nabors, which has also been buying back shares, said that 93% of its outstanding 0% convertible notes due 2021 have been put back for a total redemption price of $769.8 million, or $688.89 per note.

Nabors reported late Monday that fourth-quarter earnings nearly doubled, to $210.6 million from $108.7 million, on strong prices and demand for drilling rigs. Its earnings per share of $1.35 per share, before a $25.6 million judgment against the company from a class-action arbitration involving employee compensation, beat Merrill Lynch's estimate of $1.25 per share.

But Merrill Lynch analysts Alan D. Laws, Michael Farah and Eral Gokgol-Kline were cautious about the company's prospects, saying "negative earnings revisions are increasingly likely for Canadian leveraged drillers and oil service companies" like Nabors. In a note early Tuesday, the team cut its view on Nabors to sell from neutral.

"We believe the strong fundamental backdrop outlined by NBR will be materially eroded by the magnitude of sector capacity additions and potential deterioration of the natural gas price fundamentals this spring," they wrote.

The plunge at Nabors was seen elsewhere in the oil and energy sector, which had a poor day on Tuesday.

Chesapeake Energy Corp.'s 4.5% convertibles due 2054 saw bids come down about 3.75 points to 95.21 against a $31.73 stock, said a sell-side source. At another desk, the convertible changed hands at about 97 against a $33.75 stock. Shares of Oklahoma City-based Chesapeake (NYSE: CHK) ended the session at $31.73, down 6.12% or $2.07.

"Everybody in energy is on fire," an analyst said.

Citadel rises in Disney deal

A sell-side source said the 1.875% convertibles due 2011 of radio broadcaster Citadel traded at about 82.5 against a $12 stock on Tuesday, about six points higher than bids received a day earlier against the same stock at another desk. The movement came after Citadel (NYSE: CDL) said it would merge with Disney's ABC Radio in a $2.7 billion deal to form the third-largest radio network in United States.

"There's a lot of talk about whether those [convertibles] would be putable in the event of a merger," the source said.

Citadel stock retreated 52 cents or 4.33% on Tuesday to close at $11.48.

The merger will give Disney shareholders 52% of a new company, called Citadel Communications, which will combine the assets of Las Vegas-based Citadel and ABC Radio. Disney will borrow between $1.4 billion and $1.65 billion and pass the debt to the new company.

Pier 1 to price $150 million deal on Wednesday

Pier 1 (NYSE: PIR) plans to price $150 million of 30-year convertibles on Wednesday, with talk guiding for a 6.375%to 6.875% coupon and an initial conversion premium of 30 to 35%.

The senior notes will be due on Feb. 15, 2036, and are being priced at par of $1,000.

The notes have a 130% contingent conversion trigger, are non-callable for non-callable for five years, and have puts in years five, 10, 15, 20 and 25. They are also protected from takeovers and dividends that exceed Pier 1's current 10 cents per quarter.

Bookrunner JP Morgan also has a $15 million greenshoe option.

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