Saks sacked on piecemeal sale; Calpine sellers happy by uptick; GM mixed on dividend's fate

By Ronda Fears

Nashville, April 29 - Convertibles settled out the week on a little firmer ground Friday, traders said, or at least with some bids floating around and less resistance to lifting offers.

"It feels a little better this week," said a sellside desk analyst. "The retrenchment, capitulation, or whatever you want to call it, is starting to get to the point where some things are cheap enough to catch a bid.

"It's not over, though, I don't think, because there's still a lot of money sitting on the sidelines waiting to be put to work. So, it seems we might have a ways to go before we hit the bottom."

It seemed like a wait-and-see attitude was prevailing with regard to General Motors Corp. Those convertibles were mixed in advance of anticipated news in the May 2 week on the company's common stock dividend. The camps are fairly evenly split on whether the world's largest automaker will cut the dividend as many credit analysts have suggested is necessary to maintain an investment-grade rating.

There was still plenty of selling taking place, though. Such was the case with Calpine Corp. in the face of a nice rebound in the stock as the company affirmed guidance ahead of next week's earnings report. The news stemmed the freefall in the independent power producer's paper, but traders said selling was still heavy.

Saks Inc. saw some outright holders bail out, too, on the announced sale of its Proffitt's and McRae's department stores. One holder said there is concern about a piecemeal dismantling of the company, which leaves concern about how the debt will be divided.

Flextronics International Ltd., though, gained with no concerns raised by Nortel Networks Corp.'s announcement that it will wait until early 2006 before transferring some manufacturing assets to Flextronics rather than my midyear as previously planned, traders said. Flextronics, rather, was finding favor on a nice earnings report.

GM dividend cut argued

It is widely anticipated that GM will make a declaration in the May 2 week regarding its common stock dividend, and the onlookers are fairly evenly divided in their opinions.

"I think they have to because it's more important to maintain an investment-grade credit rating than appease stockholders. If they fall into junk, that will cost them big bucks," said a buyside convertible trader. "There's also the union negotiations [where GM is trying to get concessions on health benefit costs], and this would be a show of good faith from the company."

He said, however, that the company's news Friday that cash compensation paid to its top five executives was cut by 37% in 2004 might be a ploy toward showing the United Auto Workers union that the company is doing its part, and thus could leave the dividend in tact.

A sellside convertible analyst said he doesn't think GM will cut the 50-cent quarterly dividend, which makes for a roughly 7.5% yield on the common stock, because when it was put in place around seven years ago, it was picked as a number the company felt it could match during good times and bad.

"Besides, liquidity near term is not an issue," the analyst said. "If they cut the dividend in half, that would save $5 billion and they have $20 billion - it's the proverbial drop in a bucket."

GM's 6.25% and 5.25% convertibles, largely held by hedge funds, were described as "a little soft," with the 6.25s at 18.875 and the 5.25s at 16.5. Volume in both of those $25 bonds was very light. The GM 4.5% convertibles, meanwhile, were heavily traded and were said to have "firmed up a tad" to end at 22.75.

GM shares were off 7 cents on the day to settle Friday at $26.68.

Calpine convertibles rise

Calpine again made an effort to patch up its public perception problems, which it continued to refer to as "false" and "reckless" and "unfounded" rumors centered on speculation about defaults and even looming bankruptcy.

Calpine's convertibles shot up 3 to 8 points, but selling continued on the rise, which largely followed a 34-cent gain in the underlying stock to $1.79, a 23.5% increase on the day. The 4.75% converts were pegged up 3 points to 45.5 by one sellside shop, but at 42.75 by another. The 6% convertible was quoted up 7 to 8 points at 52.5. The 5% preferred gained 5 points to 37. In JunkLand, Calpine's 8.5s due 2011 were seen up 6.5 points to 49.

"This made a lot of sellers happy," one convert trader said.

Calpine said it ended first quarter with cash and cash equivalents on hand of about $800 million. EBITDA is expected to be around $240 million for the quarter, and the company confirmed its previous projection for 2005 EBITDA in the range of $1.6 billion to $1.7 billion. Calpine is anticipating a fully diluted loss per share of about 38 cents for first quarter and said it expects to end 2005 with a GAAP loss per share at its prior estimate in the range of 80 to 90 cents.

"Calpine is providing this update to assure investors that first quarter financial results were in line with our expectations and that we remain on track to achieve our 2005 earnings," said Calpine chief financial officer Bob Kelly in a prepared statement.

"While preliminary, we believe this update is necessary given the recent equity and bond trading volatility triggered by false rumors in the market. It is regrettable that reckless and unfounded rumors continue to impact the trading in Calpine's securities."

Calpine paper has been hammered repeatedly for a week, since market chatter started last Friday with speculation that the company was in default of certain bonds. Concerns about the power company have been persistent as it labors under a massive $18 billion debtload.

Saks sacked on sale news

Saks announced Friday a deal to sell its Proffitt's and McRae's department stores for $622 million to Belk Inc. and said it is looking at selling its other mid-priced businesses and Club Libby Lu, a youth oriented chain. Saks said it will retain its upscale Saks Fifth Avenue department stores as well as the Parisian stores as part of a new strategy to focus on the higher end of the market.

"This strategic alternative process can lead to an exciting and independent future for this business, as well as create shareholder value for Saks Inc.," Saks chief executive Brad Martin said.

There were some outright convertible players shedding the 2% convertible on the news, but sellside traders noted that there are a lot of Saks players in the hedge fund community who were basically unaffected by the news. Saks shares dropped 46 cents Friday, or 2.63%, to $17.08, and the convertible was quoted off about 3 points at 101 bid, 102 offered.

"I think the concern is that there will be a piecemeal disposal of the assets outside of the upscale stores, but that division will be left holding all the debt," said a convertible fund manager. "There is no debt assumption in the Belk deal, and that is a bad sign."

The sale of Proffitt's and McRae's is a cash transaction that also calls for Belk to take over about $1 million in capitalized lease obligations, however. S&P said Friday that its ratings for Saks (B+) would remain on watch with developing implications as Saks continues to explore alternatives for its Northern division. S&P downgraded Saks debt last week and revised watch implications to developing.

Saks' delay in filing its 10-K at the Securities and Exchange Commission is still as issue of concern by credit analysts, too.

Hartford paper replaces AIG

Buyers were lured into Hartford Financial Services Group Inc by a strong earnings report, and traders said many of those were looking to replace portfolio gaps left after selling out positions in American International Group Inc.

Hartford also boosted it 2005 earnings outlook.

The Hartford 7% mandatory due 2006 shot up 3.5 points to 66 while the 6% mandatory due 2006 rose 3.625 points to 65.5. Hartford shares rose sharply, too, gaining $5.35 on the day, or 8%, to close at $72.37.

"There has been such a big sell-off in AIG, it has hurt the whole sector, so people are flocking to any good news," said a dealer. "There was a lot of flow in both the Hartford mandatories today and it seems to me a lot of that probably involves maintaining some ratios after selling AIG."

Hartford buying counters the exodus in AIG as the troubled insurance firm becomes evermore embroiled in investigations and the like.

Early Friday, AIG said it will again delay filing its 2004 financial reports as auditors attempt to sort out accounting errors. The Wall Street Journal was reporting Friday that accounting errors at AIG may range between $2.5 billion and $2.8 billion, citing people familiar with the matter. That would be about $1 billion more than AIG's previous estimate.

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