GM, Ford convertibles mixed, stocks lower; airlines jump; oil services weaker, but Seacor gains

By Rebecca Melvin

Princeton, N.J., Oct. 6 - The convertibles market remained active on Thursday, with plenty of sellers putting pressure on names in oil services, retail and other sectors. But the convertible bonds of General Motors Corp. and Ford Motor Co. were mixed as their underlying stocks continued to move downward.

Convertibles in the airlines sector also saw improvement compared to Wednesday, when the overall convertibles market dropped 1.2% as the underlying stocks lost 2.2%, according to Merrill Lynch's Convertible Daily Monitor.

Retail names started out better, but weakened throughout the day. The Dress Barn Inc., however, managed to hold on to gains, according to a New York-based sellside trader. Dress Barn's 2.5% convertible due 2024 traded at 128.9, up about four points, in line with its stock, after the retailer posted a 6% increase in same-store sales in September.

Also trading were real-estate investment trusts, including New York City-based Vornado Realty Trust and Melville, N.Y.-based Reckson Associates Realty Corp., with Vornado under pressure.

GM, Ford mostly up on swap

Nervousness continued to dominate the market in automotive names Thursday, sending General Motors and Ford convertible paper in mixed directions, but mostly up on swap, traders said.

Convertibles players said speculation regarding whether General Motors will cut its dividend, a move that has been anticipated all year, factored into trades on Thursday. Concerns also remain regarding whether General Motors will lend financial help to its ailing parts supplier Delphi Corp., which may be headed to bankruptcy court if it doesn't get help from the automaker.

A dividend cut would be good for valuation of the preferred paper on a swap basis; but it's a tricky play, and "you'd better have your delta right," a New York-based sellside analyst said. Such a move would "slaughter" General Motors' stock, he said.

"A dividend cut has been anticipated all year at some point. It's viewed as unsustainable. You're not going to get the unions to swallow major concessions when the stock yield is 6.5%, which is where it has been," the analyst said.

General Motors has three $25 convertible bond issues, which together with Ford's preferred shares, dominate the convertibles market, the strategist said. "It's the biggest part of convertibles."

On heavier-than-average trading, General Motors' 4.5% convertible bond and its 5.25% bond moved in opposite directions, with the 4.5s moving higher by 0.09 point, or 0.38%, to 23.90, while the 5.25% $25 convertible bonds closed down 0.12 point, or 0.64%, to 19.17.

On light volume, the 6.25% General Motors convertible finished up 0.07, or 0.41%, to 17.26.

General Motors shares extended losses, finishing down 28 cents, or nearly 1%, at $28.35, following a $1.45 slide on Wednesday.

Ford preferred shares added 0.08 point, or 0.23%, to 34.78 as its common shares fell a dime, or 1.1%, to $9.32.

Oil services names under pressure

Amid a pullback in energy prices, the convertibles of oil services companies, Halliburton Co. and Schlumberger Ltd. were mostly weaker Thursday, although Schlumberger shares recouped their losses late in the session, ending in positive territory, which lifted its convertibles as well.

But the convertibles of Seacor Holdings Inc. were better by about 0.25 point, a hedge fund convertibles trader said, with trades of its 2.875% convertible due 2024 at about 111.125. Its shares closed down 76 cents, or 1.1%, at $67.50.

Houston-based Seacor and its subsidiaries operate a diversified fleet of offshore support vessels for oil and gas exploration and development in the Gulf of Mexico.

Halliburton's 3.125% convertibles were down about three points to about 168.5, compared with its closing share price of $60.77, down $1.47, or 2.4%.

Schlumberger's 2.125% convertibles traded early in the session at about 113 and later rose about a point to 114.

Other energy convertible names, including Devon Energy/Chevron convertibles, also extended weakness amid the pullback in crude oil and gasoline prices. Devon/Chevron paper fell in line with its underlying shares, a trader said.

Chesapeake lower

The convertibles of Chesapeake Energy Corp. were also weaker as their underlying shares declined $2.91, or 8.2%, to $32.59.

On Thursday, crude oil for November delivery closed down 2.3%, to $61.35, at a two-month low.

Although prices of natural gas, which is Chesapeake's chief business, are 108% higher then they were last year at this time, there is recognition "that natural gas currently is not a go-forward price, and although it could get even higher in the short term, it is going to come back down," a buyside analyst said.

"Natural gas is more inelastic than it has been in the past, with greater demand relating to heating in the winter and air conditioning in the summer; but at the end of the day, if people can't afford it, they can't afford it, and behaviors will change," the analyst said, citing the idea that people are likely to stop building bigger houses and conserve energy in other ways to keep from paying such high prices.

Late Monday, Oklahoma City-based Chesapeake announced plans to buy Columbia Natural Resources LLC from Triana Energy Holdings for $2.2 billion, plus $800 million in debt/liability. After the acquisition, Chesapeake will have the third largest natural gas reserves in the United States.

Gimme Credit analyst Philip Adams said in research published Wednesday that Columbia Natural's Appalachian gas reserves sell at a premium to southwestern and western U.S. gas basins and the Nymex prices due to their proximity to northeastern U.S. gas markets.

"We think this premium is likely to persist, as it will take years for the multiple pipeline projects now being proposed from the Rockies to the East to be completed," Adams said.

Chesapeake said that financing the Columbia Natural deal will consist of roughly $1 billion of common or preferred equity and more than $800 million of straight and convertible preferred debt. The rest will come from cash and other sources, with Adams suggesting the possibility of an asset sale.

The company also has a current bank revolver of $1.25 billion.

Airlines take flight

The convertibles of airlines, including Continental Airlines Inc., AMR Corp, the parent of American Airlines, and JetBlue Airways Corp., strengthened on Thursday as retreating oil prices sparked a rally in the sector that left Continental stock up 13%.

On Continental's $1.38 stock jump, leaving shares at $11.88, its 4.5% convertibles gained about four points JetBlue trade at 86.125, compared to a level of about 82 on Wednesday.

JetBlue also jumped, with its 3.5% convertibles up about a point, a New York-based trader said, with trades at 87.50 bid, 88 offered.

JetBlue shares per share increased $1.12, or 6.2%, to $19.17.

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