General Motors converts fall as uncertainties dull edge of dividend cuts

By Kenneth Lim

Boston, Feb. 7 - Convertibles of General Motors Corp. traded down with the stock on Tuesday despite credit-positive news that the auto maker would halve its dividend payout.

Analysts and traders said the impact of the cuts may have been offset by uncertainty about the Detroit auto maker's merger-and-acquisition plans, as well as early speculation that already priced some of the news in the spread.

"It's almost like the converts are unchanged, which is a bit surprising," said a sell-side analyst. "In terms of valuation, the converts are a lot more attractive today than yesterday."

General Motors' 4.5% convertible due 2032 was seen trading lower by 0.32 point, or 1.36%, at 23.23 against a $22.64 stock in the afternoon. The least equity-sensitive 5.25% convertibles due 2032 changed hands at about 16.34, down 1.57% or 0.26 point, against the same stock price. The most equity-sensitive of General Motors' convertibles, the 6.25% notes due 2033, traded at about 17.60, 2.22% or 0.4 point lower than the previous close. The 4.5% convertibles closed at 23.20, or 1.49% down, while the 5.25% convertibles ended at 16.34, down 1.57%. The 6.25% convertibles closed 2.33% lower at 17.58. The stock closed at $22.81 on Tuesday, down 53 cents or 2.27%.

General Motors announced early Tuesday that it would cut its dividend to 25 cents a quarter from 50 cents a quarter, saving the Detroit automaker about $565 million in annual payments. The move is part of a larger package of cuts aimed at offsetting losses at General Motors' North American operations. Other plans include reducing management salaries, trimming health benefits for salaried retirees and evaluating ways to adjust its pension plan.

The announcement came a day after a Jerome York, a top aide to billionaire investor Kirk Kerkorian, was elected to General Motors' board. York is a consultant to Kerkorian's investment firm, Tracinda Corp., which is the car maker's third-largest shareholder, and had urged similar actions last month to improve the company's profitability.

A New York-based analyst said that although the convertibles market initially reacted positively to the news, "a lot of it was already built in."

"A dividend cut is not necessarily a huge impact to the credit matrix, and as much as that goes, it may not have been as huge a credit benefit as people have been anticipating," the analyst said.

Dividend cut seen worth 0.5 to 1.30 points

But another analyst thought it was unlikely that the market priced in such a sharp cut. He reckoned that the 5.25% convertibles could have a half point theoretical improvement, while the 6.25% convertibles could benefit 1.30 point.

"Clearly it's a positive in that the income pickup increases, which thereby increases the embedded option value of the converts," the analyst said.

But the analyst noted that those benefits could be reduced by uncertainty about General Motors' plans to sell its financial unit, General Motors Acceptance Corp., and ongoing labor issues involving the union and former subsidiary Delphi Corp.

General Motors has been trying to sell GMAC, which reportedly received competing offers from consortiums involving Citigroup and Wachovia Corp., to raise GMAC's credit rating. General Motors chairman and chief executive Rick Wagoner said on Tuesday that the company still plans to sell GMAC, but did not provide details.

"Wagoner didn't discuss GMAC, didn't discuss Delphi, so there's still some significant overhangs over this company," the analyst said. "It's one thing to say this improves theoretical values, but there's clearly still some huge uncertainties."

Another analyst said there is also doubt about the GMAC sale. "GMAC is one of their better assets, so if they sell it, what are they left with? Also, can they really sell this thing? Who's in a position to buy?" the analyst said.

Moody's Investors Service said it was keeping its B1 rating of General Motors and Ba1 rating of GMAC under review. Although Moody's viewed Tuesday's cuts as "constructive," it said "the likely near-term impact of these actions is not considered to be of sufficient magnitude to offset the concerns cited in the pending review."

Standard and Poor's and Fitch Ratings also maintained negative views of General Motors' credit.

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