Health Management continues to gain on sweetener; General Motors slides amid alliance talks

By Kenneth Lim

Boston, July 3 - The convertible bond market saw only light trading on Monday as markets shut down in the afternoon ahead of the July 4th holiday.

Health Management Associates Inc. improved slightly for the second day after the company sweetened its convertible ahead of a put date, although some investors continued to express uncertainty over the extent of the new terms.

General Motors Corp.'s convertibles declined with the stock ahead of poorer vehicle sales figures after the market closed, and despite reports that rival auto maker Nissan Motor Co. Ltd. and Renault SA were open to taking a stake in the Detroit company.

Meanwhile, a report by Citigroup said the rate of U.S. convertible issuance could continue at a healthy clip after posting strong primary market volume in June.

The market in general had an unexciting session with many investors out of the office for the holiday.

"There's nothing going on today," a sellside convertible trader said.

Health Management climbs further

Health Management Associates' 1.5% convertible due 2023 rose another 0.375 point outright on Monday, adding to gains made Friday after the company offered a sweetener ahead of an August put date.

The convertible was seen at 101.5 early Friday, as Health Management stock (NYSE: HMA) closed at $19.83, up by 0.61% or 12 cents.

Health Management said Friday that it will pay to each note holder "a payment equal to 2.875% per annum on the principal face amount" from the February 2007 coupon date onwards, making the extra yield available only to investors who do not put their notes by the Aug. 1, 2006 deadline. The company will also extend the call protection on the note by two years, to Aug. 5, 2010, and suspend its $250 million stock buyback program until after the put deadline.

Health Management is a Naples, Fla.-based operator of acute-care and psychiatric hospitals.

A Lehman Brothers report from Friday said the new terms would add just over 7.5 points to the theoretical value of the convertible, to 100.34 after the put date based on a credit spread of 75 basis points over Libor and a volatility of 18%.

A Connecticut-based convertible bond trader said there was some confusion over what the eventual yield would be because of the way Health Management's press release was written.

A market source said Health Management had indicated that the 4.375% yield was correct, but Health Management representatives could not be reached for confirmation.

The Lehman report, written by analyst Venu Krishna, noted that its calculations assume that Health Management will end up paying a 4.375% yield on the convertible - adding the 2.875% to the existing 1.5% - and not raising the coupon to 2.875%. Simply raising the coupon to 2.875% will not be attractive enough to sway investors from putting the convertibles, Krishna said.

A trader said the unclear wording of the press release raised concerns that the sweetener was not well planned, and that a 2.875% final yield - which would not have been effective - may actually have been the intention.

"If anybody had done this for them, it would have been a better press release," the trader said. "If they worked this out internally, who knows, they may just be shooting themselves in the donkey."

General Motors slows outright

General Motors ended lower on Monday, retreating from gains made Friday after billionaire investor Kirk Kerkorian said rival auto makers Renault and Nissan were interested in taking a stake in the company.

The General Motors 4.5% convertible due 2032 (NYSE: GXM) gained 0.37% or 0.09 point to close at 24.49. But the 5.25% convertible due 2032 (NYSE: GBM) slid 1.09% or 0.2 point to end at 18.54, while the 6.25% convertible due 2033 (NYSE: GPM) closed at 20.21, down by 0.49% or 0.1 point. General Motors stock (NYSE: GM) closed at $29.41, down by 1.28% or 38 cents.

Nissan and Renault said Monday they are open to including General Motors in their alliance if General Motors offers a proposal.

General Motors also reported Monday after the market closed that it sold 25.7% fewer vehicles in the United States in June 2006 compared to the year-ago period. Year-to-date, General Motors sales is 12.2% lower.

Moody's Investors Service said Monday that the proposal would not have any immediate impact on the ratings of the companies.

"While additional cash investment by Renault and Nissan could be helpful, it would be unlikely to meaningfully benefit the rating," Moody's said in a statement.

Credit Suisse equity analyst Christopher Ceraso wrote in a note that an alliance between Renault, Nissan and General Motors was "tantalizing," especially if it resulted in Renault-Nissan chief executive Carlos Ghosn ending up at the helm of the Detroit auto maker.

But the alliance is no "panacea," Ceraso said, adding that General Motors has recently exited earlier global alliances with Fiat Auto, Fuji Heavy Industries and Suzuki. General Motors also does not need more global scale, purchasing heft or global vehicle architectures, the analyst wrote.

But the suggestion of an alliance could put pressure on General Motors' management to improve results, Ceraso wrote. An alliance could also generate positive buzz around the stock, and give the company a chance to take on more employee costs.

Deal issuance still healthy

Convertible bond issuance in the United States will continue to see healthy volume after a busy month in the primary market, says a Citigroup report.

"We look for year on year comparisons to remain positive," wrote Citigroup convertible analyst Stuart P. Novick in a report.

The $9.8 billion raised from 20 new convertible issues in June was the most in any month since June 2003, when $18.4 billion in proceeds were raised in the primary market, Novick noted. Yields and premiums moved in favor of convertible investors in June, with the weighted average yield of the new deals at 3% and conversion premiums at 23.9%.

A large number of mid- to large-sized deals and a good mix of industries among issuers suggest that the convertible bond market is accessible to companies in a variety of sectors, Novick said in the report.

On a macro level, increased stock volatility has improved option values in convertibles, while rising interest rates are making convertibles a more attractive means of raising cash for companies, Novick wrote.

"With higher equity volatility and rising interest rates likely to fuel further issuance, we expect a healthy volume of new deals to continue over the next few months," Novick wrote.

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