GM, Ford weaker after reported losses, cash burn; Sprint Nextel extends gains; Wyeth firm

By Rebecca Melvin

New York, Nov. 7 - General Motors Corp. convertible bonds fell Friday after the Detroit automaker reported a $2.5 billion loss and worse-than-expected cash burn of $4.2 billion amid steeply slumping car sales for the third quarter.

Ford Motor Co. convertibles moved lower to the mid 20s from the upper 20s after the Dearborn, Mich.-based automaker reported a narrowed third-quarter loss, boosted by a gain related to its retiree health-care settlement; but cash burn of $7.7 billion, which was larger than expected.

The earnings reports served as reminders of the dire straits that the automakers find themselves in, and touched off speculation about when the U.S. auto industry will get government assistance and whether the companies might consider bankruptcy filings.

For its part, GM says restructuring in bankruptcy isn't being considered.

Instead, the heads of the three big automakers and the top auto workers' union representative met with Rep. Nancy Pelosi in Washington Thursday, seeking some form of government bailout to help them stay afloat.

Overall the convertibles market saw pockets of strength Friday, maintaining some of the healthier tone from earlier in the week. Improved convertibles prices early in the week gave way to some softening beginning Wednesday, which reversed the market's performance last week, when selling pressure gave way to strength mid-week.

Sprint Nextel Corp. edged up after disappointing earnings that also included a debt reduction and restructuring announcement.

Wyeth, on a slow but steady rise recently, also held on to gains; and Omnicare Inc., which has been active in recent sessions, also held its own.

Genzme Corp.'s convertibles, which have been active since the Cambridge, Mass.-based biotech called $690 million of its 1.25% convertibles, remained strong. The paper is being called Dec. 1.

Meanwhile, Bank of America Corp. convertible preferreds traded at 720 versus $20.5.

GM weaker after earnings

The short-dated GM 1.5% convertibles due June 2009 (GRMs), which are not very equity sensitive, sank $1.95, or 13.4%, to $12.65.

"Those came in," a New York-based sellsider said.

The GM's 5.25% convertibles due 2032 (the GBMs) lost $0.52, or 8.5%, to $5.60, off its lows, and versus a closing share price of $4.38, which was down a similar 9%.

Initially the "B" bonds, which trade like preferreds, were down harder than the common. When the Bs were at $5.30 Friday, the yield was at 47%, according to one sellsider.

The GM 6.25% convertibles due 2033 (the GPMs) lost $0.43, or 7%, closing at $5.59, also off its lows.

The long-ailing U.S. carmakers were pummeled in 2008 as record high fuel prices curbed demand for large cars and trucks earlier in the year, and a subsequent financial system crisis further hobbled consumers.

While GM chief Rick Wagoner was positioning the company for immediate assistance, preferably, he said, during the current lame duck session of Congress, convertibles players thought government assistance would more likely come with the new administration. They didn't know, however, what that assistance would mean for the auto sector two or three years down the road.

"I don't think Bush wants his last act as president to be to bail out the auto industry," a New York-based sellside trader said.

Another New York-based sellsider said: "The new administration is going to do everything it can to protect the unions and save jobs, and that means someone has to pay."

The sellsider observed that while the auto makers differ from financials, government involvement will still mean that someone will get hurt. He referred to the forced financial mergers and bailouts in September as hurting convertible preferreds.

Liquidity concerns were raised Friday by GM's and Ford's earnings reports.

GM currently has $16.2 billion in available liquidity, and said it needed liquidity of between $11 million to $14 billion to operate.

Wagoner said dramatic weakening in the economy has hurt GM and that in addition to "additional measures on the self-help side, as well as asset sales," it will pursue Washington talks. Restructuring is not a good idea, he said, and GM doesn't even "think about it for a second."

Also as part of its earnings release, GM said that it is no longer pursuing a merger or acquisition with another U.S. automaker, saying that any synergies it presented wouldn't kick in until the medium to long term. And the short-term liquidity issue is the main concern right now.

Ford lower after earnings

Ford's 4.25% convertible due 2036 traded Friday at 25 versus $1.90. But the stock closed off its lows, up 2% at $2.02.

The Ford convertible note traded at 27.75 against a stock price of $2.15 a week ago, and on Sept. 26, the Ford 4.25s traded at 63 versus $5.

Investors were particularly concerned about Ford's cash burn figure for the third quarter, which at $7.7 billion, accelerated significantly from previous quarters. The burn rate was higher primarily due to lower production volumes as plants were idled and workers were laid off in response to a drop in consumer demand.

In addition to idling capacity, the company also said it plans to respond to the dramatically weakening economy by reducing costs related to salaried personnel by 10%, mostly through job cuts, and decrease truck and car output by about 200,000 vehicles from last year.

Slumping consumer confidence and tight credit markets were blamed for the poor performance.

Ford reported a loss of $129 million, or six cents a share, versus a loss of $380 million, or 19 cents a share, in the year-earlier period. Excluding items, the loss in the latest period was $1.31 a share, much worse than consensus estimates.

Revenue tumbled to $32.1 billion from $41.1 billion in the year-earlier period.

Ford said its North American salaried personnel-related cost cuts will be taken by the end of January, and the number of U.S. hourly employees will be reduced by about 2,600. It also said it will eliminate merit pay increases and performance bonuses for salaried employees.

The company set plans to upgrade its Ford, Lincoln, and Mercury lineups in North America almost completely by the end of 2010 to bring six European small vehicles to North America and to retool three North American truck plants to produce small, fuel-efficient vehicles.

Sprint edges higher again

The Sprint/Nextel 5.25% convertibles notes due 2010 printed at 87.75 during the session and were seen closing at about that level versus a share price of $3.37. The notes traded at 87.5 on Thursday, but had recently been as low as 82.

Shares of the No. 3 U.S. mobile phone service fell 8.4% on its report that it lost customers and swung to a loss for the quarter. But the Overland Park, Kan.-based company also said it was re-doing a key credit line, replacing a $6 billion revolving credit facility with a new $4.5 billion facility. The new agreement will help ensure that it doesn't trip the covenant in coming months.

The Sprint bond is 14-month paper and has a large coupon, with a 17% yield to maturity, and the credit is improving, a sellsider said.

Sprint, the third-largest U.S. wireless provider, lost $326 million, or 11 cents a share, for the three months ending Sept. 30, compared to $64 million, or two cents a share, in the year-earlier period.

Excluding one-time items, the company would have broken even during the quarter, it said.

Revenue fell 12% to $8.81 billion from $10 billion a year earlier.

The company said it will pay higher interest under the new agreement and cannot pay cash dividends unless certain conditions are met. It also said it repaid $1 billion of the outstanding loan under the amended credit agreement.

The Sprint bonds have improved in the last week or so. On Monday, the Sprint 5.25s were "dramatically better," trading at 85.5 bid, 86 offered, compared to one day before at 82 bid, 85 offered. The improvement may have been due to its decision to not sell its Nextel unit.

In early August, Sprint Nextel pulled a planned $3 billion of cumulative perpetual convertible preferreds due to market conditions.

Wyeth holds firm

Wyeth's floating-rate convertibles due 2024 traded at 98.5, which was similar to its pricing Thursday. The paper of the Madison, N.J.-pharmaceutical company has been gaining in recent sessions.

One New York-based sellsider gave a myriad of reasons for its strength. The convertibles come due in seven months and are expected to get at rate boost in January. It's a good credit as well, and in the healthcare sector that could get a lift from the next administration, he said.

Mentioned in this article:

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Omnicare Inc. NYSE: OCR

Sprint Nextel Corp. NYSE: S

Wyeth NYSE: WYE

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