GM, Ford sputter but drive volume in Tower Auto, American Axle; TOP Tankers delayed

By Ronda Fears

Nashville, May 10 - In the aftermath of General Motors Corp. and Ford Motor Co. finally slipping into junk territory last week, convertible traders said Tuesday that auto parts suppliers like American Axle & Manufacturing Holdings Inc. and Tower Automotive Inc. continue to see high trading volume.

"Anything to do with the auto sector is seeing a lot of action right now," said one trader. "There is not a lot of movement in price but these [auto suppliers] are very, very active."

Selling once again was the dominant theme in convertibles Tuesday, as noise about hedge fund withdrawals from the convertible market due to the GM and Ford situations sparked a "mini-exodus, if not an out-and-out evacuation," as one head trader put it.

There was widespread chatter that QVT Financial LP and GLG Partners suffered heavy losses from positions in GM, which was denied by the hedge funds; the talk also hit Deutsche Bank as it reportedly brokered the trades.

"Negative sentiment gripped the market, basically," said the head trader. "All the financial issues traded of, and the mood pretty much spread throughout the market."

Another sellside trader referred to Tuesday's session in convertibles as a "melt down."

"I'm not sure why everyone is worried about who is going under or who is liquidating," he scorned. "Focus on your own portfolio. Trying to guess what someone else is doing is foolish. FUD - fear, uncertainty, and doubt - causes pain."

A multi-strategy hedge fund manager in New York pointed out that liquidation noise has been riddling the convertible market for months now and, in fact, London-based "GLG has been a seller of converts for weeks."

TOP Tankers beached again

The irascible mood among players has strained the primary market, as well. Lazard Ltd.'s and Ivax Corp.'s new issues from last week have traded off in the secondary market, and on Tuesday, TOP Tankers Inc. yet again postponed its new deal.

TOP Tankers sweetened indicative terms on its $300 million perpetual convertible preferred last week but then delayed the deal from pricing after Thursday's close. On Monday, the guidance was again widened and pricing slated for after the close Tuesday.

Early Tuesday, buyside sources said it appeared the TOP Tankers deal would get done, with the books scheduled to close at 2 p.m. ET. But at the end of the day, the deal did not price and market sources said they were told to check with sole bookrunner Cantor Fitzgerald early Wednesday for a status report.

The latest price talk on the deal puts the dividend between 6.50% and 6.75% and initial conversion premium at 20%. It had been revised previously to a dividend of 5.875% to 6.0% and premium of 30% to 32.5% from a dividend of 5.625% to 5.875% and premium of 32.5% to 37.5%.

When asked about the deal and to elaborate about what the problem with it was, one fund manager in New York said, "Nothing per se. I haven't spent that much time on it, but it's really for larger funds with more risk appetite. I am trying to be selective."

Other buyside sources have expressed concern about the company's common stock dividend and that the Athens-based oil shipping firm might go private.

TOP Tankers shares on Tuesday lost 22 cents, or 1.42%, to close at $15.34.

GM, Ford traffic light

Ironically, as the broader markets nosedived, GM was one of only a pair of Dow components to finish Tuesday on higher ground. Analysts said GM shares were propped up by its commitment to leave its dividend and by billionaire Kirk Kerkorian's offer last week to boost his stake in GM by 5%.

GM convertibles, as well as Ford's, which together account for around $13 billion of the convertible market, tracked their other bonds lower as the junk status continues to weigh on both credits.

"We've seen the GM bonds widen anywhere from 500 to 600 basis points just in the last two or three sessions," said a derivatives trader. "That's fantastic."

Volume in the GM and Ford convertibles was described as very light Tuesday, but traders said the issues were all a little easier, although changed very little, as selling remained the focus.

"I'm not going to touch GM or Ford," said one New York hedge fund manager. "The problem with GM or Ford is at this point they are so far out of the money it's largely a credit play, which I won't get involved with."

GM's 6.25% convertible closed at 19.625, the 5.25% issue at 16.875 and 4.5% issue at 23, a broker said, while GM shares gained 20 cents on the day, or 0.64%, to settle at $31.53.

Lehman Brothers Inc. convertible analysts on Tuesday said the risk/return characteristics of the 6.25% convertibles offer several compelling reasons to swap out of the common stock, or also as a swap out of the 5.25% converts into the 6.25s. (See full story elsewhere in this edition.)

Meanwhile, Ford's 6.5% convertible trust preferred lost about 0.25 point to 38.375 with the underlying stock down 17 cents, or 1.71%, to close at $9.78.

Auto suppliers turn southerly

GM and Ford, however, were the driving forces behind a recent spike in trading volume for auto-related convertibles, traders said.

American Axle & Manufacturing, whose business is about 79% weighted to GM, is in danger of following the world's largest automaker into junk territory, said a sellside desk analyst. He noted that on weaker first-quarter earnings and dampened earnings guidance, Standard & Poor's revised its outlook on American Axle's triple-B credit ratings to negative from stable.

The American Axle 2% convertible was quoted closing Tuesday at 81, which one trader said would be off about 1 point from Monday's close. But another trader said he saw the issue settle Monday with a bid of 72.75. American Axle shares on Tuesday lost 21 cents, or 4.5%, to close at $4.47.

Tower Automotive is already as junked as possible, after filing bankruptcy in early February. The Tower Auto 5.75% convertibles were pegged at 20 bid, 21 offered at Tuesday's close. The trader said there was little change in the price but lots of bonds changed hands.

Hedge funds dump Delta

No trades were seen in some of the Delta convertible issues Tuesday, despite the company's warning that due to severe liquidity constraints it may be forced to file bankruptcy. Sellside convert traders said they saw no action in the 8% issue, but there were several big hedge funds selling out of the 2.875% issue.

The 2.875s dropped 2 to 3 points to the 30 bid, 31 offered context, one sellside trader said. Another said the 2.875s dropped as much as 3.5 points during Tuesday's session from a bid of 35.5 on Monday. Delta's junk bonds came in on the latest mention of bankruptcy, too, with the 7.7% bonds due 2005 seen off 2 points to 78 bid, 80 offered.

Delta shares lost 33 cents on Tuesday, or 10%, to end at $2.97.

Weighed down by skyrocketing fuel prices, pension liabilities and ruthless competition, Atlanta-based Delta warned in a Securities and Exchange Commission filing that despite trimming billions in costs, it expects a substantial loss for the remainder of 2005 and, according to Delta, "cash flow from operations will not be sufficient to meet all of our liquidity needs for that period."

"We cannot assure you that the anticipated benefits of our transformation plan will be achieved, or that these benefits, if achieved, will be adequate for us to maintain financial viability," Delta wrote in the filing.

Delta, which reported a nearly $1.1 billion loss in first quarter, had $1.8 billion in unrestricted cash at the end of March. Delta has significant financial obligations for the rest of the year, including $450 million in pension funding requirements, plus another $3.1 billion in pension payments over the next three years.

AmEx taxis lower with Delta

In addition, the company is looking to change terms of some financing deals with lenders GE Commercial Finance and American Express Travel Services Co. Inc. because of the high fuel costs, and that pressured the AmEx convertibles lower by around a quarter point.

During first quarter, Delta said borrowed about $250 million - the final installment of a financing agreement with AmEx - and another $20 million under a revolving credit facility that is part of a financing agreement with GE Commercial Finance and other lenders.

Delta is working to amend covenants on these loans which, if not changed, could result in the obligations being accelerated and the airline force to repay the debt immediately. In that event, or a big decline in the carrier's cash position, it would result in a bankruptcy filing, Delta warned.

"A restructuring under Chapter 11 of the U.S. Bankruptcy Code may be particularly difficult because we pledged substantially all of our unencumbered collateral in connection with our out-of-court restructuring in the December 2004 quarter," Delta said in the filing.

Hence, traders said, the extreme weakness in Delta's convertibles, as "the only thing these out-rank is the stock."

United gets pension relief

After the closing bell, the Associated Press reported that a federal bankruptcy judge approved United Airlines' plan to terminate its employees' pension plans Tuesday, clearing the way for the largest corporate-pension default in American history.

But, onlookers said that the decision also could pave the way for a similar move by Delta and other troubled airlines.

The United ruling shifts responsibility for its four defined-benefit plans to the government's pension agency, Pension Benefit Guaranty Corp. PBGC initially opposed United's plan but agreed to drop resistance last month in exchange for up to $1.5 billion in notes and convertible preferreds in a reorganized UAL Corp., United's holding company.

United's pensions are under-funded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion. The previous largest U.S. pension default was Bethlehem Steel's $3.6 billion in under-funding in 2002, according to AP.

Convertibles of other airlines were lower alongside Delta on Tuesday. AMR Corp., parent to American Airlines Inc., convertibles lost about 1 to 1.5 points, while both Continental Airlines Corp. and Northwest Airlines Corp. issues each lost 1 to 2 points.

Merrill plugs JetBlue 3.75s

Amidst the flight from the troubled airline sector, Merrill Lynch analysts are recommending JetBlue Airways Corp.'s 3.75% convertible as a total return alternative to the stock. Compared to the common stock, the 3.75% convertible combines higher current yield, ranks higher in the capital structure and offers a superior risk/reward profile.

Merrill convertible analyst Marc Malloy said in a report Monday that the firm is recommending the JetBlue 3.75% convertible both on an outright basis and as an equity swap. JetBlue also has a 3.5% convertible that is putable at par in 2008, he noted, but is more of a yield alternative due to the higher strike price and therefore less equity sensitive.

At 100.25 for the convertible, compared to $20.70 for the stock, the convertible is trading with a current yield of 3.7% and a 24.2% conversion premium. Since its issuance, the price of the convertible has essentially remained flat while the stock has climbed 15%, Malloy pointed out. This has led to premium contraction of almost 20% from when it was issued in March 2005, he added.

Using a 668 basis point spread over the five-year Treasury and a 40% equity volatility assumption, he estimated the 3.75% convertible is trading 8.2% cheaper than theoretical value of roughly 110. For reference, he noted that JetBlue's five-year credit default swaps are trading around 588 bps over Libor and the long dated JetBlue options with similar strike prices are trading with an implied volatility of around 41%.

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