GM bonds extend slide; AMD drops; Best Buy lower; but Advanced Medical, Medtronic gain

By Rebecca Melvin

Princeton, N.J., Oct. 12 - Investor wariness left the convertibles market mostly weaker again Wednesday, with bonds of General Motors Corp. extending a slide lower in heavy volume, and selling seen in Advanced Micro Devices Inc., despite generally positive numbers from the chip maker posted after the close Tuesday, traders said.

Best Buy Co. convertible bonds slipped as the consumer electronics retailer's stock sagged amid investor concerns about interest rates and consumer spending. Lehman Brothers published research recommending Best Buy's 2.25% convertibles as a way to make headway in currently rough market conditions by going long the bond and over-writing calls.

A few names in healthcare were better, namely the two medical device makers Medtronic Inc. and Advanced Medical Optics Inc. Medtronic boosted its forecast for earnings per share in fiscal 2006 through 2008 and reiterated its long-term goal of 15% annual profit growth.

Meanwhile Carnival Corp. was lower on an outright basis, but its 1.132% convertibles gained about 0.50 point on swap, a buyside trader said.

The convertibles market was mostly lower for the fifth out of six trading sessions. And October's dry spell in new issuance continued as the midpoint of the month's second week passed.

Uncertainty still looms for GM

The convertibles of GM remained in negative territory on Wednesday, but GM shares climbed to a higher close after news that billionaire investor Kirk Kerkorian raised his stake in the automaker to just under 10%, up from 9.5% to 9.7% in September, and Deutsche Bank upgraded GM to "hold" from "sell," reasoning that most of the potential negative news for the company has been priced into the shares already.

Kerkorian purchased 2.1 million shares of common stock in the open market on Tuesday, according to a Securities and Exchange Commission filing. The average purchase price for the shares was $26.98 a share, for a total purchase price of about $56 million.

But "the credit continues to gyrate," a New York-based sellside analyst said. "The yields are converging for all senior notes, including its straight bonds and convertibles."

The analyst said investors are focused on General Motors' third-quarter results expected next week, when "hopefully they will provide more color on the situation."

The situation relates to the Chapter 11 bankruptcy filing made by GM's primary parts-supplier Delphi Corp. on Saturday.

"Some of the selling and activity is clearly to get ahead of that earnings announcement," he said.

GM's credit default swaps have widened in the last few days as have the spreads for the straight debt, and the convertibles are moving down because of the widening credit, he said.

Nevertheless, he suggested now might be a good opportunity to swap out of straight debt into convertibles. The move would reduce cash outlay since the 5.25% $25 GM convertible bonds are trading at about 64 cents on the dollar, while the straight debt is at about 80 cents on the dollar, he said.

On Wednesday, the 4.5% GM bonds lost 0.38 point, or 1.64%, to close at 22.81, extending a 1.11% loss on Tuesday. The 5.25% paper lost 0.15 point, or nearly 1%, to close at 15.96., and the 6.25% convertibles shed 0.07 point, or 0.39%, to end at 18.11.

But GM shares stemmed its losses to add 28 cents, or 1.1%, to close at $26.70.

Wary investors reject AMD's report

The 4.75% convertibles of Advanced Micro Devices eased more than 3.5 points Wednesday as its shares fell 12.50% despite better-than-expected third-quarter earnings.

One convertibles source surmised that the chilly investor response was related to the Sunnyvale, Calif.-based chip company's omission of guidance on its flash memory business. Another said the decline looked like a sympathy move related to disappointment about Apple Computer Inc.'s lower-than-expected sales for its fiscal fourth quarter.

Another cause for concern was that Advanced Micro's profit margins in the midst of strong revenue growth. In the third quarter, its sales rose 23%, gross margins expanded a bit, operating income grew about 15%, and net income rose 73% compared to the year earlier quarter.

The 4.75% Advanced Micro convertibles traded down 3.5 points to 105.50, and its shares closed down $3, or 12.50%, to $21.

Early in the session, the 4.75s traded at 109.25, versus a share price of $23. And prior to that, a recent level was seen at 109.50 bid, 109.75 offered.

Retail outlook pressures Best Buy

The 2.25% convertible bonds of Best Buy traded down about 2.5 points as its shares dropped $1.25, or nearly 3%, to $41 on Wednesday. The retail sector has had some weakness of late due to concerns that consumer spending might be crimped by high energy costs in the fourth quarter. Also last week, Best Buy lowered its quarterly earnings forecast, blaming ongoing costs related to hurricanes Katrina and Rita.

Lehman Brothers published research Wednesday on Best Buy's 2.25% convertibles, suggesting to investors three alternative strategies to sell out-of-the-money calls, including a short three-month, medium five-month, and relatively longer-term, 15-month strategy.

The Best Buy 2.25% convertibles with sales of out-of-the-money calls were viewed "as an attractive risk-adjusted play on Best Buy," allowing investors to collect premium amid current uncertain market conditions, Lehman said.

Best Buy shares have "come under pressure" in the past few weeks as the retailer's first and second quarter strength gave way to full year guidance that fell short of expectations, Lehman also noted, quoting Monday's close when Best Buy was $41.86, or 21% below its 52-week high.

"By selling calls at a higher implied volatility against a long convert position (28.9 implied volatility) investors can monetize the higher volatility in the options market which appears rich at current levels," the research note stated.

The 2.25% bonds have a conversion price of $46 and a conversion ratio of 21.739.

The trades are defensive yet attractive in terms of risk-reward profile and are likely to appeal to investors seeking to participate in Best Buy's potential upside while lowering downside risk, Lehman said.

Medtronic, Advanced Medical see buyers

The convertibles of Medtronic gained a point or more as its shares lifted 3.6% after the Minneapolis-based company raised its guidance for three years, saying it will benefit from continued growth and a lower tax rate.

"The convertible paper has a put pretty soon and it's undervalued so there is no downside," a New York-based sellside analyst said.

Its 1.25s traded at about 100.75, compared to trades at 99.50, versus a stock price of $52.60, on Tuesday. Medtronic closed on Wednesday at $54.79.

Meanwhile, both the 2.50% and 3.50% convertibles of Advanced Medical edged up about 0.25 point compared to its stock price amid buyer interest, a trader said. The 2.5s traded at 91.65 on Wednesday, according to the NASD Trace system.

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