GM, Ford selling accelerates; El Paso, Calpine, NRG plunge; Ivax, Teva lose; Lucent, Tyco unwound

By Ronda Fears

Nashville, April 15 - Selling remained the theme in the convertible market Friday as players tried to shed positions ahead of the weekend and before a crop of earnings reports in the April 18 week that are sure to be disappointments, particularly those of General Motors Corp. and Ford Motor Co.

Lucent Technologies Inc. is also scheduled to report earnings in the April 18 week, and traders were unwinding positions in those convertibles, as well as Tyco International Ltd., although the conglomerate is not due to post results for another two weeks.

A big plunge in stocks, with the major stock indices losing nearly 2% on Friday, conspired with a slide in the dollar to compound the depression in convertibles, sources said. Worse yet, several added that a drop in crude oil futures and an eight-week low in Treasury yields provided no respite.

Oil's decline, rather, was a catalyst for big losses in Big Oil names like Amerada Hess Corp. and independent producers, including Chesapeake Energy Corp. which is weighted more to natural gas. Amerada Hess' 7% mandatory fell 3 points to 79.875 while Chesapeake's new 5% convertible lost 2.375 points to 98.375 bid, 98.875 offered.

Utility and power names weren't exempt because of the decline in raw energy prices, either, with El Paso Corp., Calpine Corp., NRG Energy Inc., Aquila Inc. and Reliant Energy Inc. all mentioned heading south.

Ivax Corp. and Teva Pharmaceutical Industries Ltd. went into a downward spiral on news of losing a patent battle with Eli Lilly & Co. over generic versions of a Lilly anti-psychotic medication. A sellside desk analyst said a good portion of biotech and drug convertibles, however, are "insensitive" to some of the widespread pressures in the market, although most were marked lower on Friday.

Among other bits and pieces, market sources mentioned trading in Finisar Corp., Novell Inc., Charter Communications Inc., Beazer USA Homes Inc., Freeport-McMoran Copper & Gold Inc. and Xerox Corp. - all lower.

Players pause, await trough

Selling pressure across the board in convertibles for the week was "monumental," as one sellside trader put it. Some market participants were seeing potential entry points on the horizon due to this week's ravaging, but would-be buyers were clinging to the sidelines on uncertainty about a bottom.

As for the magnitude of the week's wreckage, one sellside trader used the following analogy:

"Sell fast. Sell fast, and sell twice as much as you're long. We are making $100.00 BILLS at $88.00 to $92.00 and getting hit. The outcome is $84.00 to $88.00," the sellside source said.

Translation: "It means no one is buying, anything. Wouldn't you buy a $100.00 bill for $92.00? We were trading [at] 100.00 and our market [dropped to] 88.00 to 92.00. Someone came in and hit us at 88.00, and we moved our market down."

Indeed, traders on all sides of the market were still reporting Friday that offers, no bids, were the norm, with better and better, or lower and lower, prices - obviously suggesting that the cheapening had not signaled an entry point.

"Lots of stuff is interesting and cheapening up, but you just don't know where the bottom is," the sellside trader said.

A sellside desk analyst added: "Some customers are saying that issues are starting to look compelling at this time, but most of them are hesitant to commit capital since those cheap issues might be even cheaper next week, after a couple of other liquidations."

It's not even a matter of selling and piling up cash.

"Nobody has cash these days," said one outright convertible fund manager. "Everybody is losing assets. Anything that is cheap is still getting cheaper. I don't think we've neared the bottom quite yet."

Ivax, Teva suffer; peers steady

Generic drugmakers Ivax and Teva suffered from the ruling in a patent dispute regarding Lilly's drug, Zyprexa, which raked in $4.4 billion in sales last year, although an appeal is anticipated. Many biotech and drug names followed suit, too, but volume was light in many of those smaller bond issues.

Units of Ivax and Teva had challenged a 1993 patent that granted Lilly exclusive U.S. rights to market Zyprexa until 2011; the losers have pledged to file an appeal. Meanwhile, though, Ivax's two convertibles lost more than 2 points each and Teva's convertible dropped 1 to 2 points.

Several drug issues had been supported early in the session by positive drug trial results from Genentech, traders said, but many gave way to markdowns on selling pressure in the underlying stocks as the day wore on.

A handful of drug stocks were mentioned by the sellside desk analyst as "economically insensitive" to the broader market pull. Those were Allergan Inc., Cephalon Inc., Chiron Corp., Wyeth and Schering-Plough Corp. Among those, only Cephalon and Chiron shares closed lower Friday.

Allergan's zero-coupon convertibles were quoted at 88, the Cephalon 2.5s at 94.5, Chiron's 2.75s at 96.25 and 1.625s at 92.75, the Wyeth floater at 103.5 and Schering-Plough's mandatory at 54.125.

GM, Ford downside heavy

Ahead of earnings next week from GM and Ford, which have both issued warnings about the upcoming results, selling in their convertibles continued to amass.

"You might think all the negative news has been priced in," said a buyside trader, who was selling GM paper. "But, we feel like there is more downside coming next week, particularly on the credit."

In regard to GM's credit, which is teetering on the brink of junk territory, a couple of buyside market sources mentioned they were looking at the credit default swaps in the name, or General Motors Acceptance Corp. versus GM.

A wildcard in the GM story could be a common stock dividend cut, but many onlookers say they do not expect GM to act on that possibility so quickly out fear of a backlash from stockholders. First, onlookers expect the automaker will first focus on concessions from labor, particularly with regard to health care costs. On Thursday, United Auto Workers officials expressed an unwillingness to reopen contract negotiations, though.

GM, Ford see massive selling

GM's 6.25% convertibles, heavily played by hedge funds, saw 2.5 million of the $25 bonds change hands on the New York Stock Exchange on Friday, compared with the three-month running average of 1.5 million. The issue dropped 0.375 point to 19.34.

GM's 5.25% convertibles, another $25 bond also largely played by hedge funds, was very active, as well, dropping 0.375 point to 17.45 on Friday. The 4.5% convertible, yet another $25 bond but played more by outright convertible funds or retail investors, also lost 0.375 point on Friday to close at 22.9.

GM shares plunged another $1.06, or 3.98%, to $25.60.

GM's straight bonds retreated ahead of the earnings, too, with the 8.375s due 2033 seen in the high-yield market falling 5 points to 74 bid, 75 offered. GM is set to report earnings on Tuesday.

Ford's 6.5% convertible also was sold off in a big way, with 2.9 million of the $50 trust preferreds trading on the NYSE on Friday. The issue plummeted 0.75 point to 37.4, while Ford shares lost 25 cents, or 2.56%, to $9.50. Ford is scheduled to report earnings Wednesday.

Calpine 4.75s fall 4.5 points

Selling was heavy in power and utility names, too, particularly for distressed situations like Calpine, traders said.

"Essentially this paper is trash right now," said one sellside trader in energy issues. "The credit is just rotten, really. Any bids that had been left on the table were getting hit, for sure."

Calpine's 4.75s fell around 4.5 points Friday, he said, to 61.25 bid, while the 6s were quoted down by 7 points at 71.75 bid, 72.75 offered. Calpine shares plunged Friday by 26 cents on the day, or 9.81%, to close at $2.38.

El Paso's new issue was among the casualties in the power and utility sector. The new 4.99% perpetual convertible preferred, which was reoffered at 97.5, fell another 1 point to 93.25 bid, 93.5 offered, while the underlying stock dropped 14 cents, or 1.41% to $9.82.

Reliant Energy, Aquila and NRG Energy were all in negative territory, too.

The trader said the utility sector's weakness was partly due to concerns about raw commodity costs and those companies' ability to recoup costs from ratepayers. For independent power producers like Calpine, she said, it could prove to be tougher to collect higher rates.

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