Bear Stearns recommends GM Series B convert

By Ronda Fears

Nashville, Tenn., March 18 - Bear Stearns & Co. head of convertible research Yaw Debrah recommends the General Motors Series B convertible over the Series A because of the higher coupon, greater participation with an uptick in the stock and better downside protection. Moreover, it is good for investors who want exposure to the stock as it provides better yield while waiting for improvement.

"For investors who would like exposure to the stock, but who would like to be paid to wait while the fundamentals of the company develop, we propose the 5.25% convertible bond," Debrah said in a report Monday.

"We prefer the Series B bond because it has a higher coupon and greater equity upside participation. The Series A bond offers better downside protection."

The Series B convert has a 5.25% coupon and the Series A has a 4.5% coupon, each with a par of $25 rather than the customary $1,000. Both are due 2032 and rated A3/BBB+.

The Series B issue has a simple convertible bond structure, with the addition of a put structure which enables investors to put the bonds back to the company after 12, 17, 22 and 27 years. The issue size of $2.6 billion provides good liquidity and is exchange listed so there is good price visibility, the analyst noted.

The 5.25% convertible was trading Friday at 27.1 against a stock price of $59.9 and a conversion premium of 17.5%. At this level, it offers a current yield of 4.9%, which is 150 basis points more than the underlying common, which pays a dividend yield of 3.4%.

"On a price appreciation and depreciation basis, the convertible is currently showing 60% movement with the underlying equity. When you couple this together with the current yield of 4.9%, you get an attractive risk/reward profile," Debrah said in the report.

"We estimate that for a 25% rise in the equity over the next year, the convertible will give you 75% participation, on a total return basis. On the other hand, if the equity was to drop 25% over the next year, we estimate that the convertible will only participate in about 48% of the equity loss."

Domenic Martilotti, Bear Stearns auto analyst, has an attractive rating on the underlying stock, Debrah noted. Martilotti has noted that auto sales in the month of February came in better than expected with only a 4% decline from a very strong month a year ago, and GM turned in the best results of the Big Three automakers.

Martilotti is still somewhat cautious on the sector given the poor industry fundamentals, but sees short-term trading opportunities in the stocks, as he expects to see some oscillation in the group as the economy attempts to gain its feet, Debrah said.

General Motors 5.25% Series B due 2032 (A3/BBB+)

Convertible Price: 27.1

Common Price: $59.90

Conversion Premium: 17.45%

Current Yield: 4.85%

Common Yield: 3.34%

Yield-to-maturity: 4.73%

Yield-to-put: 4.35%

Conversion Price: $64.901

Conversion Ratio: 0.3852

Put: March 15, 2014

Call: March 15, 2009

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