General Motors slides further on bankruptcy fears; Digital Realty flat in gray; financials end rally

By Kenneth Lim

Boston, April 14 - The convertible market had a mixed session Tuesday as equities retreated and financials gave back some gains from earlier rallies.

General Motors Corp. remained active and continued to weaken amid pessimism about the company's ability to avoid bankruptcy.

Digital Realty Trust, Inc. was bid at par in the gray market ahead of its planned $200 million offering, with analysts viewing the deal as attractive but not as cheap as other recent deals.

In the financials, Bank of America Corp. and Wells Fargo & Co. were lower as investors took profits on gains from the previous weeks.

The market in general had a mixed session, a sellside convertible trader said.

"Stocks are down, so a lot of names are worse outright," the trader said. "The markets can't keep going up. People were looking for an excuse to take profits, which is what you saw today, but I would say it's mixed. I think some of the bigger credits are holding up dollar-neutral or better."

General Motors weakens

General Motors' three main series of convertibles fell even further Tuesday as investors continued to lose confidence in the company's ability to avert bankruptcy.

The company's 5.25% convertible due 2032 and 6.25% convertible due 2033 slipped slightly to 2.05. The 1.5% convertible due June 1 came in to 5.5, lower by 0.5 point. General Motors common stock closed at $1.78, up 4.09% or $0.07.

General Motors is a Detroit-based automaker.

The convertibles weakened with the company's bonds on Tuesday on speculation that the company could consider reducing its offers to bondholders, which will likely be rejected by the creditors, a convertible trader said.

"If they don't offer enough to the bondholders, bondholders aren't going to make a deal and it's going to end up in court," the trader said. "But even if they go to court I don't know how much more the bondholders are going to be able to get. There's very little cash to talk about, so you're just looking at equity. That's going to depend on how they restructure the company."

Digital Realty flat

Digital Realty's planned $200 million offering of 20-year senior unsecured exchangeable notes was bid at par in the gray market and offered about 1 point higher, market sources said Tuesday.

The deal was expected to price Tuesday after the market closed, with price talk at 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 Digital Realty Trust, LP and exchangeable into common stock of the listed parent.

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.

A buyside analyst said the market appeared to be valuing the company's credit at about 1,000 to 1,100 basis points over Libor.

'Somewhat less generous'

"I think the pricing was somewhat less generous than recent deals," the analyst said. "This one doesn't appear quite as cheap, although it's still reasonably attractive, especially towards the cheaper end of the range."

Digital Realty has weathered the current economic problems better than other REITs, the analyst said.

"I think this one kind of stands apart from most of the others in the space," the analyst said. "I don't think there are many other REITs that can bring a deal in the current environment. This one has a stock that has done relatively well. It's tied more to the tech sector than to REITs."

A convertible trader said the deal's attractiveness was partly affected by the stock's decline on Tuesday. Digital Realty common stock fell 8.83% or $3.47 to close at $35.83.

"The stock fell today, so that's probably affecting the bids a bit," the trader said. "It's an interesting deal, not a great sector, but it looks reasonable."

The trader said the lack of a large discount in the price talk was not necessarily a negative.

"At some point the deals will have to stop being so cheap," the trader said. "If issuers don't like the terms the market's offering, they'll stop issuing converts, and the primary market's going to dry up again, and that will drag down the entire market. As an investor, you always want the deals to be cheap, but too many deals that are too cheap, that's not good for the market either."

Financials retreat

Financials gave back some of their recent gains Tuesday in line with a general pullback in the markets.

Bank of America's 7.25% convertible preferred was up early at about 520, but slipped back to 512.5 on Tuesday as the common stock closed at $10.09, down by 8.44% or $0.93.

Bank of America is a Charlotte, N.C.-based bank holding company.

Wells Fargo's 7.5% convertible preferred also eased about 0.25 point outright to trade at 578, while the common stock fell 7.12% or $1.40 to close at $18.27.

Wells Fargo is a San Francisco-based bank holding company.

One convertible trader said the financials were down mainly because of profit-taking.

"I think some people are trying to cash in on the past couple of weeks," the trader said. "They think whatever optimism there is has been priced in, it's time to take profit and wait and see what happens after earnings come out."

A sellside desk analyst echoed that view.

"A lot of it was just trading up on anticipation of results," the analyst said. "Probably a 'buy on rumors, sell on news' kind of thing."

Mentioned in this article

Bank of America Corp. NYSE: BAC

Digital Realty Trust, Inc. NYSE: DLR

General Motors Corp. NYSE: GM

Wells Fargo & Co. NYSE: WFC

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