GM falls on bankruptcy talk; BofA, Wells Fargo up on earnings hopes; Digital Realty plans deal

By Kenneth Lim

Boston, April 13 - General Motors Corp. dropped on Monday to lead a generally weaker convertible market amid overall uncertainty about corporate earnings.

General Motors' three main series of convertibles all came in after a New York Times report over the weekend said the U.S. Treasury wants the automaker to prepare for a possible bankruptcy filing by June 1.

Financial names saw some action ahead of expected earnings, with most of the banks improving slightly on optimism about their results for the past quarter, although investors continue to watch the sector from some distance away.

The primary market continued its resurgence with a planned $200 million offering from Digital Realty Trust, Inc. that is expected to price Tuesday after the close.

In the secondary markets, Ingersoll-Rand Co. Ltd.'s new 4.5% convertibles due 2012 were seen up slightly at 118 against a stock price of $16.25.

The common stock of the Hamilton, Bermuda-based maker of commercial and industrial products slipped 0.54% or $0.09 to close at $16.53 on Monday.

The new Newell Rubbermaid Inc. 5.5% convertibles due 2014 traded at 120.5 against the closing stock price of $7.50. The common stock slipped 0.92% or $0.07 during the day. Newell is an Atlanta-based maker of consumer and commercial products.

The market in general had an active session on Monday, a sellside convertible trader said.

"Volumes are not too bad," the trader said. "The primary market's back, that's bringing back some interest. Some of the recent paper has done really well."

But the mood was cautious to begin the week.

"I think this GM thing is dragging the market down," the trader said. "People are waiting to see how earnings look."

General Motors falls on bankruptcy fears

General Motors' three main series of convertibles all fell on Monday after reports said the company could face pressure by the government to prepare for a potential bankruptcy later in the year.

The General Motors 5.25% convertible due 2032 fell about ¼ point to 2, while the 6.25% convertible due 2033 lost ½ point to 2. The 1.5% convertible due June 1 lost ¾ point to trade at 6.

General Motors common stock fell to $1.71, down by 16.18% or $0.33 on Monday.

The New York Times reported over the weekend that the U.S. government wants the Detroit-based automaker to prepare for a potential bankruptcy filing by the middle of the year. The company has said it prefers to avoid a bankruptcy petition.

The bankruptcy speculation was the main weight that dragged the convertibles down on Monday, a desk analyst said.

"Everything's come way in," the analyst said. "If the stock goes to zero, you're convertible into nothing, and you're not going to get your dividend. The GRMs have been trading at like 11 or 12 maybe a week or two ago. Now they're less than half that."

Trading in General Motors paper has been slim, although there are quite a number of holders who want to sell, the analyst said.

"No one's really interested in buying them," the analyst said. "There are definitely guys who are trying to peel out of these while they can, but I can't say there's a lot of two-way flow."

That value of the convertibles will partially depend on what investors think would be a possible recovery value in the case of a bankruptcy, the analyst said.

"They've kind of bottomed out where they are, but maybe guys are attributing a bit of recovery," the analyst said. "Even for unsecured credit you could end up with some equity in a reorganized company. I don't know how much that's going to be worth, but that's how it plays out sometimes."

Buyers could also see some gains if there is no bankruptcy, the analyst noted.

"If they don't file, you're going to make some good money on this trade," the analyst said.

Speculation about bankruptcy should however not be a surprise, the analyst said.

"They've been on again, off again for weeks, even months now," the analyst said. "Ford looked like it was going to at some point as well, but they look like they've dodged a bullet for now."

Financials hold firm

Bank of America Corp.'s 7.25% convertible preferred eked out a slight gain at 51 outright on Monday amid optimism about the banking sector.

The Charlotte, N.C.-based bank holding company's common stock ended the day up by 15.39% or $1.47 to close at $11.02.

Wells Fargo & Co.'s 7.5% convertible preferred was also up modestly at 58.5 early Monday. The common stock closed at $19.67, up by 0.31% or $0.06. Wells Fargo is a San Francisco-based bank holding company.

Following Wells Fargo's surprisingly strong guidance for first-quarter net profit of about $3 billion, financial names have begun to show some strength, a sellside trader said.

"I think people are hopeful that the worst could be over," the trader said. "I think it does embolden people a little to come back to the markets."

But investors retain a sense of caution, the trader said.

"You don't want to miss the rebound, but you don't want to be caught in a bear rally either," the trader said. "There's some upward correction here, which isn't surprising, but it might not be a return of a bull market."

Digital Realty plans deal

Digital Realty Trust plans to price $200 million of 20-year senior unsecured exchangeable notes after the close on Tuesday through its operating partnership subsidiary, Digital Realty Trust, LP, market sources said. Price talk is for a coupon of 5.25% to 5.75% and an initial exchange premium of 17.5% to 22.5%.

The notes will be issued at par by the subsidiary and exchangeable into common stock of the parent.

Digital Realty common stock closed at $39.30 on Monday.

There is an over-allotment option for a further $30 million.

Banc of America/Merrill Lynch, Citigroup, Credit Suisse and Deutsche Bank are the bookrunners of the Rule 144A offering.

Proceeds will be used to repay revolving debt, to acquire additional properties, to fund development and redevelopment opportunities and for general purposes.

Digital Realty is a San Francisco-based real estate investment trust that focuses on the technology industry.

Mentioned in this article

Bank of America Corp. NYSE: BAC

Digital Realty Trust, Inc. NYSE: DLR

General Motors Corp. NYSE: GM

Ingersoll-Rand Co. Ltd. NYSE: IR

Newell Rubbermaid Inc. NYSE: NWL

Wells Fargo & Co. NYSE: WFC

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