GM bonds lower, credit widens on bankruptcy scare; Digital River plunges; Par Pharma in

By Rebecca Melvin

Princeton, N.J., Oct. 27 - Convertibles players sold General Motors Corp. bonds on Thursday as bankruptcy fears flared after the automaker said the Securities and Exchange Commission had subpoenaed the company as part of an investigation into its dealings with bankrupt auto parts supplier Delphi Corp.

GM credit default swaps also widened on the news, but then tightened slightly at the end of the day, according to a derivatives trader.

"The market finished with a bullish tone," he said. "It's not a lot tighter, but it's tighter."

Earnings news again spurred a number of big moves in convertible paper including that of software company Digital River Inc., which saw its bonds better by about 0.50 point on a hedged basis but lower by more than 10 points outright.

Also seeing plenty of activity were the convertibles of generic drug maker Par Pharmaceuticals Inc., which moved in a little as its shares surged in a relief rally of sorts after the company reported solid third-quarter results.

MGI Pharma Inc., a biopharmaceutical company, was also active, with its convertible bonds trading in line with a 2% drop in shares.

Elsewhere in the health care space, the shares of European drug maker GlaxoSmithKline plc lifted amid higher sales and lower manufacturing costs. But its convertibles, seen higher in line with its shares, weren't reported trading.

Moving in the opposite direction after earnings was European drug discovery company Elan Corp., based in Dublin, Ireland, which saw its 6.5% convertibles indicated 4 points lower, although no trades were reported, after it narrowed its third-quarter loss and pulled in previous guidance to the lower end. It said its 2005 loss before interest, taxes, depreciation and amortization would now be closer to $240 million, compared to an earlier estimate of $240 million to $260 million.

Oil names were weaker with Diamond Offshore Drilling Inc. in about 4 points on news that the company will consider a special dividend in the first quarter of 2006, according to a New York-based sellside analyst.

But Cooper Cameron Corp. convertibles gained about 2 points after the maker of valves, wellheads and other oil and gas pressure-control equipment reported third-quarter profit that more than doubled, driven by new orders and acquisitions.

Also trading higher was Community Health Systems Inc. on news of its higher profit for the third quarter.

Advanced Micro Devices Inc. convertibles were indicated lower but weren't seen trading actively after the semiconductor company announced that it was redeeming all of its 4.5% convertibles, which are callable beginning in December. The move was called "widely expected," according to a New York-based sellside trader, who added that it makes sense to call the in-the-money bonds.

GM slides after subpoena news

Skittish investors pulled down the stock and bonds of General Motors and its credit widened after news that the SEC is probing its financial reporting of pension benefits and its other dealings with Delphi, its former subsidiary. Ford Motor Co., which has its own employee benefits with which to deal, also saw its convertible preferred shares lose ground.

These days even a hint of bankruptcy scares investors, said a New York-based sellside trader, regarding the strong downward move. "The fact that the automaker put out a 1:30 a.m. press release to appease European shareholders shows the sensitivity to these developments."

"On a volatility basis, if you trade it the right way, you can make money," he also said.

"The credit widened, and then tightened," said a derivatives trader, describing the day's trading. He put the last market at 820 to 850 basis points, after it had been up at 860 bps earlier in the day. On Wednesday before the SEC subpoena news, the GM credit default swaps were 800 to 825 bps.

The credit default swaps of GMAC, of which GM has said it is seeking to sell a stake, also saw its credit widen to 255 to 265 bps, for a quote. Some analysts said that the latest news could cause a deal on the GMAC stake to be delayed, but not precluded.

Of GM's $25 convertible bonds, popular with retail investors, the 6.25% bonds lost the most ground, closing down 0.84 point, or 4.36%, at 18.41. The 5.25% convertibles had the next biggest loss, closing down 0.60 point, or 3.51%, at 16.50; but they weren't heavily traded. The 4.50s shed 0.35 point, or 1.48%, to 23.25.

GM shares lost $1.98, or 6.79%, to $27.19.

Ford preferred shares closed down 1.12 point, or 3.53%, to 30.65, while its shares ended at $8.14, down 38 cents, or 4.46%.

Digital River drops on guidance

The 1.25% convertibles of Digital River fell about 13 points outright but were up 0.50 point on a hedged basis after the e-commerce provider guided expectations for its 2006 results lower when it reported third-quarter earnings after the close Wednesday that matched expectations.

Responding to the report, Piper Jaffray, First Albany and Oppenheimer downgraded the shares on Thursday.

Piper Jaffray downgraded the shares to "market perform" from "outperform," while the others lowered the company to "neutral" from "buy."

For 2006, Digital River said it expects $1.44 per share profit on revenue of $250 million. Analysts had been expecting $2.39 a share on $260 million of revenue.

Guidance for the fourth quarter was in line with expectations at 51 cents profit on sales of $57 million.

For its third quarter, the Minneapolis-based company posted earnings of $12.4 million, or 31 cents a share, up from the year-ago $8.1 million, or 22 cents a share. Excluding items, earnings rose 72% from a year ago to 50 cents a share, two cents ahead of the Thomson First Call analyst estimate. Revenue also beat the Thomson estimate, rising to $53 million from $39 million a year earlier.

The bonds traded at around 93, compared to Wednesday's levels at 106 bid, 107 offered. Shares of Digital River fell $9.77, or 26.1%, to $27.71.

Par Pharma bonds in on earnings

The convertibles of Par Pharma were lower on a dollar neutral basis by about 0.25 point as its shares jumped nearly 17% after the generic drug maker reported earning that were expected, though "not great," a sellside trader said.

The jump in its shares was short of a relief rally, the trader explained, because last quarter the stock was higher, but revenue came in light and the stock fell hard.

The opposite happened this time. The stock has been driven down during the last week, but with the earnings coming in close to expectations they bounced higher.

In addition the company was upgraded by CIBC World Markets to "sector perform" from "sector underperform."

The Woodcliff Lake, N.J.-based company said that its decision to sell branded drugs of its own helped boost its results in the third quarter.

The company reported net income of $25.3 million, or 74 cents per share, compared with a loss of $35 million, or $1.03 per share, a year ago. Excluding tax gains and asset impairment charges, the company posted net income of $10 million, or 29 cents per share, down from $16.2 million, or 48 cents per share, a year ago. Revenue fell 22% to $118.7 million.

Par Pharma's 2.875% convertibles due 2010 were seen at 80.5 bid, 81.5 offered. Its shares surged $3.64, or 16.72%, to $25.41.

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