Convertibles mostly weaker, but Sprint, Tyson regain a little; Best Buy edges lower; GM better

By Rebecca Melvin

New York, Nov. 12 - The convertible bond market was described as weak Wednesday amid light volume as shares extended losses for a third consecutive day. But there were a few convertible names that bounced a bit higher despite lower underlying shares.

Investors were rattled by U.S. treasury secretary Henry Paulson's announcement that the government has decided against buying bad mortgage assets from banks and instead will use the remainder of the $700 billion bailout package to buy stakes in banks. Citigroup Inc. fell $1.16, or 11%, into the single digits, closing at $9.64.

The Dow Jones Industrial Average closed down 411.20 points, or 4.7%, to 8,282.66; the Nasdaq dropped 5.2% to 1,499.21; and the S&P 500 also lost 5.2% to 852.30.

Several convertibles sources said Wednesday they were feeling a lot poorer.

But Sprint Nextel Corp. convertibles held up much better than their underlying shares, which plunged 23% to a new 52-week low. The Sprint/Nextel 5.25% bonds due 2010 retraced a couple of points lost Tuesday, finishing the day at around 84.5.

Starting about a week ago, all the old Nextel bonds were getting better after the company decided to keep the Nextel assets, a New York-based sellside analyst said.

Tyson Foods Inc. convertibles also rebounded slightly even as their shares fell another 6% after analysts cut their estimates and said Tyson's debt levels might require getting another credit agreement.

Best Buy Co. Inc. was down about 1 to 2 points after the electronics retailer sharply cut its fiscal 2009 earnings outlook.

But General Motors Corp. bonds regained their footing, along with their underlying shares, as it looked increasingly likely that the Detroit auto giant would be able to negotiate funding from Washington to stave off bankruptcy.

Sprint holds up, adds a little

Sprint/Nextel 5.25% convertibles due 2010 moved to 85 from 83 during the session and settled at 84.5, compared to 88 on Monday.

Shares of the Overland Park, Kan.-based telecom company extended their recent slide to six sessions, falling precipitously Wednesday to end down 58 cents, or 23%, at $1.95.

Last week the company reported that it swung to a third-quarter loss of $326 million and lost customers, including 1.3 million wireless customers. It also said it planned to revise a credit agreement with a higher interest rate than the initial one.

In addition, the company announced Oct. 30 that it was unable to find a buyer and intends to keep Nextel.

Looking at Sprint from an outright perspective it provides about 18% return to maturity, but that's "the best you could do," a New York-based buysider said.

The convertibles have a high conversion price of $58 compared to the current $2.00 stock price. Sprint has 2.5x debt to EBITDA, compared to about 3xs debt to EBITDA for Qwest.

But the buysider preferred the Qwest convertible over Sprint's due to the possibility of a rise in the stock to the conversion premium.

"Both generate a good amount of free cash flow, and I think both maturities are fairly safe," he conceded.

The buysider said his fund has weathered the current downturn by upgrading credit quality, shortening maturities and lowering conversion premiums to be able to participate in any rebound.

The Qwest convertibles provide a pretty good risk/reward profile, and as far as the sector overall, it's relatively cheap, the sellsider said. Still it's competitive, with competition from cable potentially harming the fixed line side, and slowing consumer expenditures potentially harming the wireless side, he noted.

"But cash flow is fairly stable. There's not much growth, making it almost like a utility, but free cash flow is 20%," he said. "There's also consolidation, and you could win that way."

Tyson also rebounds slightly

Tyson's 3.25% convertibles due 2013 traded late in the session at 66.5, compared to a close Tuesday seen at 63.79.

Tuesday's close represented a slide of about 9 points outright from the previous session, which occurred after the Springdale, Ark.-based Tyson said gains in its beef and pork units helped fiscal fourth-quarter profit rise 50% but high grain costs hurt its chicken business.

The company earned $43 million, or 13 cents a share, missing analyst estimates of 18 cents per share.

A buysider that sold out of his Tyson position over the last week, concluding the exit on Tuesday, said he missed Wednesday's rebound, but dollar neutral, it was within a dollar of Tuesday's level.

Tyson credit default swaps have widened out, the buysider pointed out, and there is a chance that they could breach their covenants.

"Basically the reason we bought them was the benefit from lower commodity prices, as a hedge, but input prices are falling and that story has come unglued," he said.

Risks from the appreciating dollar and lower exports to Russia also played into the thinking, and "we don't know if lower grain prices are sustainable for the short term," he said.

Meanwhile, Pilgrim's Pride Corp., the nation's largest chicken producer, has had to extend its credit two times since September. The Pittsburg, Texas-based company said Monday it has hired a chief restructuring officer, as required by its lenders.

Best Buy edges lower

Best Buy's 2.25% convertibles due 2022 were seen around 79.50 bid, 80.50 offered versus a share price of $22.00 on Wednesday. That compared to bids last week at around 81.50, a Connecticut-based sellside analyst said.

The Richfield, Minn.-based retailer said it expects earnings per share of between $2.30 and $2.90 for the fiscal year ending in February, down from a prior estimate between $3.25 and $3.40 per share.

The retailer also forecast revenue between $43.7 billion and $45.4 billion as well as a 1% decline in same-store sales.

The company cited a "seismic" shift in consumer behavior and said that the stronger dollar will weaken revenue and profit from its international segment more than previously expected.

The bonds, which are callable but are not expected to be called, are not expected to be able to participate in any potential upside should the stock rebound.

GM regains footing

The GM 1.5% convertibles due June 2009 (GRMs) traded up $1.01, or 10%, to $10.94, outpacing the 5.5% gain in their underlying shares.

The GM 6.25% convertibles due 2033 (the GPMs) gained $0.27, or 6%, to $4.42, also better than the shares.

But GM's 5.25% convertibles due 2032 (the GBMs) gained $0.18, or 4%, to close at $4.46 versus the 5.5% higher share price of $3.08.

In Washington, the political inclination to bail out the auto industry was building. Nancy Pelosi, speaker of the House of Representatives, plans to push for legislation next week to give "emergency assistance" to auto makers in the lame duck session of Congress.

Mentioned in this article:

Best Buy Co. Inc. NYSE: BBY

General Motors Corp. NYSE: GM

Sprint Nextel Corp. NYSE: S

Tyson Foods Inc. NYSE: TSN

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