Ford keeps sliding; Lowe's slips on poor outlook; Armor firms on reports; Bristow deal won't price so soon

By Kenneth Lim

Boston, Aug. 21 - The convertible bond market had a quiet start on Monday, with the fallout from Ford Motor Co.'s production cuts continuing to hurt the company's stock and convertible preferreds as analysts downgraded the name.

Meanwhile, Lowe's Cos. Inc. moved down in line with its stock after the company lowered its full-year forecast on the back of lower-than-expected second-quarter earnings.

Armor Holdings Inc. held steady despite a slight drop in the stock after bullish reports on smaller defense contractors were published.

In the primary market, Bristow Group Inc. may price its planned $200 million of three-year mandatory convertible preferreds only in mid-September, market sources said.

Investors blamed the summer doldrums on the light volume on Monday.

"It's pretty quiet today," a sellside convertible bond trader said. "This week and next week the most action you're going to see is probably going to be in the Hamptons."

Equity Residential's recently priced 3.85% exchangeable due 2026 was slightly higher outright, in line with its common after the stock was upgraded by UBS.

Equity Residential's exchangeable, which was reoffered at 98.75 apiece as part of an upsized $600 million deal late Aug. 16, changed hands at 99 against a stock price of $47.60 on Monday. Equity Residential stock (NYSE: EQR) closed at $47.93, up by 1.4% or 66 cents.

UBS on Monday raised its rating for Equity Residential stock to neutral from reduce, saying in a research note that the apartment real estate investment trust's repositioning of its portfolio has started to improve its earnings outlook. Equity Residential is based in Chicago.

Scottish Re Group Ltd.'s 4.5% convertible due 2022 did not trade on Monday, ignoring a new credit rating downgrade by Moody's Investors Service ahead of its December 2006 put.

Moody's on Monday cut the Bermuda-based reinsurer's unsecured debt rating to Ba3 from Ba2, citing uncertainty about the company's short-term liquidity. The move came after Standard & Poor's also lowered its rating on Scottish Re the week before.

Moody's said Scottish Re will likely be sold, but the timing of a deal remains unclear, and there is a risk the company could run out of cash before the company changes hands.

Scottish Re on Monday said it was in "active discussions regarding capital and liquidity alternatives" and stressed that all of the company's regulated units are capitalized above their required minimum. The company remains "confident" that it can execute one or more of its strategic options, the company said in a statement.

Ford slips on downgrade

Ford's 6.5% convertible preferred retreated about 1.75 points on Monday as the stock stumbled on a downgrade by Credit Suisse.

The preferred traded at 31.625 against the previous closing stock price of $8 early Monday and finished at 31.09, down by 5.21% or 1.71 points. Shares of Ford (NYSE: F), an auto maker, fell 6.63% or 53 cents to close at $7.47.

"The stock took a beating after they got downgraded," a sellside convertible trader said. "The production cut was a surprise, I don't think guys were too happy with that."

Dearborn, Mich.-based Ford on Friday said it was cutting fourth-quarter production in North America by 21%, citing poor sales of trucks and sport utility vehicles amid high gas prices.

Credit Suisse equity analyst Christopher Ceraso on Monday downgraded Ford's stock to underperform from neutral. The severe cuts make sense in the long term, but earnings will "suffer dramatically" in the near term, Ceraso wrote in a research note.

"And with the market already anticipating significant increases to cost-saving measures - as judged by the 30% surge in the stock over the past month - we think earnings are likely to disappoint for the balance of 2006 (at a minimum), making it hard for the shares to build on recent gains," Ceraso wrote.

Ford needs to save an additional $2 billion to $2.5 billion of cash over the next two years, on top of the $2 billion of cost savings already expected, to justify a stock price of $9 to $10, Ceraso wrote.

"Our sense is that the market is not yet acknowledging how severely this production cut will hit Ford's earnings and cash flow," the analyst wrote.

Lowe's hammered on outlook

Lowe's 0.861% convertible due 2021 eased in line with its stock on Monday after the home improvement retailer lowered its full-year forecast and reported poorer-than-expected second-quarter results.

The convertible traded about 2 points lower outright on Monday, at par against a stock price of $28.25. Lowe's stock (NYSE: LOW) closed at $28.35, down by 3.96% or $1.17.

"We traded a fair amount of Lowe's," a sellside convertible strategist said. "It was neutral on the stock. It moved down, although it still looks somewhat rich. But it was pretty active today in light of the earnings report."

Mooresville, N.C.-based Lowe's on Monday said its second-quarter earnings rose 11% year over year to $935 million, or 60 cents per share, from $839 million, or 52 cents per share, in the year-ago period. Analysts were expecting about a penny more on a per-share basis.

For the full year, Lowe's now expects a profit of $2.00 to $2.07 per share, down from its earlier forecast of $2.07 to $2.11 per share.

Armor firms on reports

Armor Holdings' 2% convertible due 2011 was mostly unchanged despite a slight drop in the stock after business newspaper Barron's said smaller defense contractors could benefit from an expected slowdown in the growth of the U.S. defense budget.

The convertible traded at 118.5 against a stock price of $53.125. Armor stock (NYSE: AH) eased 2.61% or $1.41 to close at $52.63.

"We saw good two-way flow on defense contractors...like Armor Holdings in light of the Barron's article," a sellsider said.

A Barron's article on Sunday said the U.S. defense budget has grown against historical comparisons that budget increases are likely to slow down. While larger defense projects could be affected, a smaller contractor such as Armor, which makes protective armor kits for vehicles and soldiers, with an "entrenched position" will likely survive any cuts, Barron's said.

Bristow may price in September

Bristow's planned $200 million of three-year mandatory convertible preferred stock may not be priced until mid-September, market sources said on Monday.

A buysider said price talk has not been set for the deal, and marketing has not begun for the offering, which was announced late Friday.

The deal, which comprises 4 million preferred shares, will be offered at $50 apiece. There is a greenshoe for a further $30 million, or 600,000 preferred shares.

Credit Suisse is the bookrunner of the registered off-the-shelf deal.

Bristow, a Houston-based provider of helicopter services to the offshore oil and gas industry, plans to use the proceeds of the deal to fund aircraft purchases. Upon the completion of the offering, Bristow will exercise options it currently has to acquire additional large aircraft.

Bristow stock (NYSE: BRS) closed at $36.90 on Monday, lower by 3.96% or $1.52.

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