General Motors get boost from rumors of union deal; Transocean, Amgen stronger; MOL to launch deal

By Kenneth Lim

Boston, March 9 - General Motors convertibles rose on Thursday on reports that the auto maker was close to a deal with the union and former subsidiary Delphi Corp., although the United Auto Workers union denied that an agreement was close.

Transocean Inc. also gained as the stock saw a slight rebound after sliding earlier in the week. Analysts said investors were seeking bargains in an oil-and-gas sector that is still fundamentally strong.

Elsewhere in the oil and gas sector, the national Hungarian oil and gas company MOL is planning to offer about €690 million of perpetual exchangeable bonds with talk for a yield between 3.5% and 4% with an initial conversion premium between 35% and 45%.

A sell-side source said the overall market on Thursday was "a little soft, there's more selling than buying."

Other names in play were the Amgen Inc. 0.125% convertibles due 2011. They were up slightly at 102.5 versus a stock price of $74.25, but were down from the previous week. On March 3, the biotech giant's convertible was seen trading at 104.75 versus a stock price of $76.50. Shares of Thousand Oaks, Calif.-based Amgen closed at $73.58 on Thursday, down 62 cents or 0.84%.

The recently launched HealthSouth Corp. 6.5% convertible preferreds due 2036 continued to stay strong, trading at about 1,030 against a stock price of $4.75. HealthSouth stock (HLSH) trades on the Pink Sheets, and closed Thursday at $4.80, 3 cents or 0.63% higher. HealthSouth, which priced the upsized issue on Feb. 28, was raising proceeds to reduce its debt, and is currently tendering for its outstanding straight bonds. The company is a Birmingham, Ala-based rehabilitative health care provider.

Chicago, Ill.-based insurance company AON Corp. was also in play on Thursday, although a sell-side convertible analyst who covers the financial sector said there was no significant news on the company. Its 3.5% convertible due 2012 was trading slightly lower at 185.25 versus a stock price of $40 on Thursday. The security was marked at 185.48 bid, 185.6 offered on Wednesday, when the stock price was $97. Shares of AON (NYSE: AOC) edged up 8 cents, or 0.2%, on Thursday to end at $39.82.

The newly offered Informatica Corp. 3% convertibles due 2026 were flat but still managed to stay above par on Thursday, trading at about 101.5 versus a stock price of $14.375. The convertible, which was priced Wednesday morning at the cheap end of talk, had closed at 101.25 versus a stock price of $14.40 on Wednesday.

GM gains on rumors

Auto heavyweight General Motors saw its three convertible bonds gain on Thursday after reports emerged that the Detroit car maker was close to striking a deal with parts maker Delphi and the United Auto Workers that could avert a strike at Delphi. The union, however, cast doubt on the speculation when it issued a statement saying there was no agreement at hand.

A sell-side source said the General Motors 4.5% convertible due 2032 (NYSE: GXM) traded at 23 versus a stock price of $20.40 during the day, while the 6.25% convertible due 2033 (NYSE: GPM) changed hands at 17.25 against the same stock price.

The 4.5% convertibles rose 0.24 point, or 1.05%, to close at 23.14 on Thursday. The 5.25% convertible due 2032 (NYSE: GBM) ended up 0.52 point, or 3.41%, to close at 15.76, while the 6.25% convertible ended at 17.21, up 0.54 point or 3.24%.

General Motors stock (NYSE: GM) was 4.51%, or 92 cents, higher at $21.34 at Thursday's close.

The reports, first published by the Wall Street Journal, said a deal between the companies and the union could include buyouts and lump-sum payments to Delphi workers in exchange for retirements or future wage cuts. Although Delphi is no longer a subsidiary of General Motors, the company remains a key supplier to the auto maker, and any strike at Delphi is expected to significantly affect General Motors' operations.

UAW-Delphi leaders are set to meet on Wednesday next week in what the union said on its website is a routine gathering to bring the members "up to date on these complicated and difficult discussions."

UAW, through a statement on its website, said of the rumors: "Nothing could be further from the truth.

"The parties are not close to working out such an agreement," UAW said. "There are many, many, significant issues to be resolved. Overall the situation has changed very little since our last meeting."

A sell-side analyst said that an agreement with the union would undoubtedly be positive for General Motors.

"It'll be good news for the credit," the analyst said. "They'll get that overhang dealt with. But they still have a big liability with Delphi."

Transocean bounces back

After sliding steadily earlier in the week, oil drilling contractor Transocean made a slight comeback on Thursday, with its 1.5% convertible due 2021 changing hands at 108.5 versus a stock price of $74.75. That was just under a point better than on Wednesday, when the security was marked at a major trading shop at 107.73 bid, 108.23 offered against a stock price of $74.57.

Transocean stock (NYSE: RIG) closed at $75.19, up 62 cents or 0.83% on Thursday.

Despite Thursday's gain, it remained about five points short of levels from the week before. The same security was marked at 113.24 bid, 113.74 offered against a stock price of $79.33 on March 3.

"The outlook for these companies has been pretty good, but there's been a bit of a sell-off in the sector and people are bargain hunting," said a sell-side analyst. "All the managements are saying that results these year will be good."

A buy-side analyst who covers the oil and gas sector said the industry as a whole continues to look strong. "There's still an incredible amount of demand," he said.

"Producers are logging in long-term contracts and we're still getting very high prices, where the drilling contractors can earn a large part of their capex back," he added.

A lot of oil producers do not want to buy or build the rigs themselves, so the fundamentals for contractors like Houston-based Transocean are still strong.

Hungary's MOL plans €690 million deal

MOL, also known as Hungarian Oil and Gas Co. plc, said Thursday it plans to offer about €690 million of perpetual exchangeable bonds talked to yield between 3.5% and 4% with an initial conversion premium between 35% and 45%.

The exchangeables, which will be sold through Jersey-incorporated finance company Magnolia Finance Ltd., are expected to be priced Friday, market sources confirmed.

Morgan Stanley and Co. International is managing the deal, which will be distributed under Regulation S.

There were a few aspects of the deal that Barclays Capital's convertible research team found were interesting.

The first was the structure of the deal. MOL is initially selling 6 million of its shares to Jersey-incorporated orphan finance outfit Magnolia Financial Ltd. at the market price of about €495 million, and Magnolia will then issue between €660 million and €720 million of exchangeables to investors, depending on the final pricing. The bond is exchangeable between years five and 10, and becomes unconditionally callable after 10 years. The coupon will also step up to 3-month Euribor plus 375 basis points after 10 years.

"We understand that the rationale for this unusual structure is for MOL to reduce the amount of treasury shares it holds while, at the same time, monetizing the underlying equity volatility," analysts Luke Olsen, Haidje Rustau and Heather Beattie wrote. "The subordinated nature of the deal means that it receives equity treatment from S&P [ratings agency Standard and Poor's]."

They explained that Hungarian regulations only allow listed companies to hold up to 10% of their own stock as treasury shares. MOL's treasury shares currently form 6.8% of its share capital, but it also has the option to buy a 10% stake from the Hungarian Privatization and State Holding Co., also known as APV, and another 7.5% from BNP Paribas.

The analysts said Scottish Power's 4% perpetual convertible bonds issued in 2003 had a similar hybrid structure, but noted that the coupon step-up in the MOL deal is below Scottish Power's 400 basis points step-up. That, and MOL's lower credit rating, "results in a higher value of the credit option and makes the [MOL] exchangeable less attractive overall on a relative basis," they said.

Also, the unconditional call option that sets in after 10 years "means that holders are effectively short a perpetual credit option on MOL," the analysts added. And because the issuer has the option of settling a conversion in cash based on the stock price - with a 105% cap of the volume-weighted average price on the second trading day after the cash settlement period - bondholders would also be short on that option.

Finally, the analysts note that the change-of-control protection for the notes is better if the change of control is unsolicited than if it were "recommended."

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