Earnings news pulls Ford higher, EMC, ProLogis lower; Energy names down with oil; AirTran to price

By Rebecca Melvin

New York, April 24 - Earnings news spurred trading of some convertible names Thursday, sending Ford Motor Co.'s convertibles higher on an unexpected profit, but causing further drag on EMC Corp. after the storage-technology company's profit dropped.

The convertibles of ProLogis traded lower by about 0.5 point after the real estate investment trust reported earnings in line with expectations but curbed its outlook to the lower end of its existing range. But the convertibles of Vornado Realty Trust added about 0.5 point despite a downgrade by Merrill Lynch to "neutral" from "buy."

Peabody Energy Corp. appeared to be pulled lower in a sector move on lackluster earnings from coal producers. While other energy names in convertibles were called lower in line with their underlying shares on a dip in oil prices.

The airline sector was higher, however, and market players wondered if the improvement would prompt AirTran Holdings Inc. to go ahead with plans to price $65 million of seven year convertibles after the close.

Market players persisted in their notion that the AirTran deal wouldn't get done due to a lack of interest, but a syndicate source said pricing was set for late Thursday.

The senior notes were expected to price with a coupon of 5% to 5.5% and with an initial conversion premium of 20% to 25%. Morgan Stanley & Co. Inc. is the bookrunner of the registered shelf offering.

Meanwhile pricing occurred on another financial preferred - the flavor of the month - East West Bancorp Inc. priced an upsized $175 million of perpetual convertible preferred shares at $1,000 par after the market close Wednesday.

No trading of the East West convertibles was seen upon release to the secondary market, and according to a syndicate source, this was due to the fact that the issue largely went to outright buyers who liked the credit.

The registered, off-the-shelf deal was increased in size from an initial $150 million. The shares priced to yield a dividend of 8% with an initial conversion premium of 22.5%.

Overall the convertibles market was seen firmer along with higher stocks, but activity was still muted, according to one West Coast buyside trader.

"People are looking at earnings and trying to get through that correctly before setting up again," he said.

Ford results drive convertibles higher

Boosted by stronger European sales and cost cuts that helped mask weaker U.S. results, Ford posted a better-than-expected profit on Thursday that drove its common and preferred shares and bonds higher.

The liquid 4.25% convertible bonds due Dec. 15, 2036 jumped as 3 to 5 points to trade at the 111 mark and higher, compared to prices in the 108 area on Wednesday.

A New York-based sellsider said his shop traded the Ford bonds at 111 versus a share price of $8.25. One trade was at 113.5 on Thursday versus a stock price of $8.76, compared to a price of 108.125 versus a stock price of $7.52 on Thursday. He said none of the preferred shares traded, however.

But the Ford 6.5% preferred shares due January 2032, which trade under ticker symbol F-PS on the New York Stock Exchange, closed up 8.7% at $35.82 on volume that was nearly double the average three-month volume.

A second source put the 4.25% bonds at 112, and Trace posted a trade of 113.5 on Thursday, compared to 108 on Wednesday.

The common shares of the Dearborn, Mich.-based auto maker (NYSE: F) closed off their highs for the day but were still up 88 cents, or 12%, at $8.40.

Ford said it still expects 2008 to be challenging, and it cut its full-year U.S. auto industry sales outlook due to the weakening economy and rising gasoline prices, but it said it remains on track to achieving North American and global automotive profitability in 2009.

Ford's net income of $100 million, or 5 cents per share, for the first quarter of 2008, compared to a net loss of $282 million, or 15 cents per share, in the first quarter of 2007.

On the other hand, Ford Motor Credit Co. reported net income of $24 million in the first quarter of 2008, down $169 million from earnings of $193 million a year earlier.

On a pre-tax basis, Ford Motor Credit earned $36 million in the first quarter, compared with $293 million in the previous year.

The company said the decline reflected higher provision for credit losses, higher depreciation expense for leased vehicles and higher net losses related to market valuation adjustments from derivatives.

"These were offset partially by lower expenses primarily related to the non-recurrence of costs associated with our North American business transformation initiative and higher financing margin," the company release said.

EMC remains weighed down

On a hedged basis, the two 1.75% convertible bond issues of EMC have "come in" a bit over the last week or so, and they continued to trade weaker on Thursday, a day after the Hopkinton, Mass.-based company reported a 14% drop in first-quarter profit but reiterated earnings and revenue targets for the year.

The two convertible bonds, which tend to trade within a point or so of each other, were at about 121.5 for the 1.75% senior notes due 2013, or the B paper; and at 120.25 for the 1.75% notes due 2011, or the A paper, according to a New York-based sellside analyst.

Shares of the company (NYSE: EMC) closed down 33 cents, or 2.1%, at $15.56.

The company said it expects to be able to meet its financial goals despite a difficult economic environment that has lengthened the time it takes to sign deals, particularly with financial-services firms and retailers.

"The Cypress spinning off of SunPower has people worried about the vol. coming in," a sellside trader said of EMC and referring to Cypress Semiconductor's spinoff of its SunPower Corp. stake.

"EMC vol is not there, and January '09 is when they can spin off VMware on a tax-free basis," the sellsider said. "That's an overhang for them."

VMware Inc., which is majority owned by EMC and included in EMC results, reported Tuesday that revenue surged nearly 70% in the first quarter.

ProLogis lower, but Vornado adds

The convertible senior notes of ProLogis were down about 0.5 point to a point after the industrial REIT reported that funds from operations rose 12%, beating estimates, but lowered its outlook for development to the bottom of its previous forecast, citing slowing in the U.S. economy.

ProLogis convertibles still looked a little rich, according to a Connecticut-based sellside trader, despite a number of REIT convertibles that have been trading better in pretty active trade.

"Along with financial names, [REITs] got overdone on the downside, and you're getting some rebound on that. There was a lot of panic over anything financial, and the heavy selling pushed valuations down to an extreme," he said.

The ProLogis 1.875% convertible notes due 2037 were at about 96 versus a stock price of $63.35 at about midday Thursday. On Wednesday, the 1.875% convertibles closed at nearly 97 versus a share price of $66.15.

Shares of the Denver-based REIT (NYSE: PLD) closed down $1.17, or 1.77%, at $64.98.

Meanwhile the convertibles and stock of Vornado were higher along with most of the rest of the REIT sector. The Vornado 2.85% convertibles traded early Thursday at 91 versus a stock price of $95. Shares of the New York-based REIT (NYSE: VNO) ended higher at $95.03, up $1.74, or 2%.

On Thursday, independent research firm CreditSights published its REIT handbook in which investors were advised to underweight the sector due to deteriorating fundamentals and capital market turmoil.

In the case that investors need REIT exposure, "we recommend the highest quality names, including Boston Properties, Simon Property Group and ProLogics," the CreditSights analysts wrote.

"...the real estate market has reached an inflection point and the ensuing shake out is causing pain for even the once savviest investors. With deteriorating fundamentals and tighter lending terms, the real estate market looks like a falling knife that we have no interest in catching just yet," the analysts said.

If necessary choose the nimblest players with strong assets in desirable markets and financial flexibility to weather the continuing storm, they said, advising investors to avoid REITs heavily reliant on secured debt, given the dramatic back-up in the CMBS market.

Three out of the four main REIT subsectors have weakened, including retail, office, and multi-family. Industrial however is at a peak, the CreditSights report said.

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