General Motors falls in line with stock; Time Warner Telecom plans $200 million deal;

By Kenneth Lim

Boston, March 17 - General Motors Corp.'s convertibles fell in line with the stock on Friday after the car maker said it was restating its loss for 2005 to add an extra $2 billion of red ink.

Meanwhile, Time Warner Telecom Inc. announced a new $200 million offering of convertible bonds expected to price in the coming week.

It was also a relatively positive week for convertibles, according to a report by Merrill Lynch that showed convertibles gaining 0.23% on Thursday, the fifth upward session, compared to just a 0.1% return from underlying stocks.

But market sources said Friday marked a quiet end to the week with the investment community distracted by the weekend and March Madness, the finale of the college basketball season.

Active names included Biomarin Pharmaceutical Inc., which saw its 3.5% convertible due 2008 trading at 109.625 versus a stock price of $14.25, said a sell-side source. A trader from a different firm saw the convertible was 113.75 bid, 114.5 offered versus a stock price of $15 on Thursday. Biomarin stock, meanwhile, continued to climb on Friday, ending the day at $14.43, 51 cents or 3.66% above Thursday's close.

The stock had surged 11.81% on Thursday after Biomarin (Nasdaq: BMRN) announced positive test results from Phase 3 trials of its drug Phenoptin, which treats the metabolic disorder phenylketonuria. Biomarin is a Novato, Calif.-based pharmaceutical company.

The newly issued Waste Connections Inc. 3.75% convertibles due 2026 also traded in line on a dollar-neutral basis, going at 99.625 versus a stock price of $39. The securities had traded at 99.75 versus a stock price of $39.05 on their debut on Wednesday. The convertibles had been reoffered at 98 points on the primary market. Waste Connections also has a floating-rate convertible, currently at 5.18%, due 2022. It traded at 122 versus a $39 stock price.

Shares of Waste Connections (NYSE: WCN) were down 27 cents, or 0.69%, on Friday for a close of $39.06. "I would say it was largely in line," said a sell-side analyst. The company is a Folsom, Calif.-based solid waste services provider.

American International Group Inc. said its fourth-quarter net profit fell more than 70% year-on-year as it incurred more than $2 billion in charges related to a settlement with regulators over alleged accounting mistakes. AIG's zero-coupon convertible due 2031 was seen at 68.5 versus a stock price of $69.25 on Friday, but analysts said the convertible was not affected much because the news was not a surprise. AIG stock (NYSE: AIG) retreated 42 cents, or 0.61%, to end at $68.82.

New York-based AIG said net profit in the quarter ended December was $444 million, or 17 cents a share, from $1.6 billion, or 62 cents per share, in the year-ago period. The insurance company's profit drop was attributed to losses from hurricane damage and to its settlement of allegations of deceptive accounting practices by the Securities and Exchange Commission and the New York state attorney's office.

Other convertibles seen trading on Friday included EDO Corp.'s 4% convertible due 2025, which changed hands at 110.25 versus a stock price of $31. Shares of EDO (NYSE: EDO), a defense equipment maker, gained 32 cents, or 1.05% to close at $30.70.

Minneapolis-based Medtronic Inc.'s 1.25% convertible due 2021 traded at 99.625 versus $53 a day after the medical device maker said it had gotten Food and Drug Administration approval to expand the marketing claims on its heart resynchronization devices. Medtronic's stock (Nasdaq: MDT) closed at $52.66 on Friday, down 30 cents or 0.57%.

General Motors falls on restatements

General Motors' three convertibles fell in line with the stock on Friday after the company said it expects its loss from last year to be $10.6 billion compared to its earlier report of $8.6 billion due to improper accounting of supplier credits and leased vehicles, and charges related to its North American restructuring efforts and its labor contracts.

General Motors' 4.5% convertible due 2032 (NYSE: GXM) closed at 23.23, down 0.14 point or 0.6%, against the closing stock price of $21.13. The 5.25% convertible due 2032 (NYSE: GBM) was down 0.18 points or 1.11% at 16.07 at the end of the day, while the 6.25% convertible due 2033 (NYSE: GPM) retreated 0.23 point or 1.31% to close at 17.37. General Motors stock (NYSE: GM) closed $1.09, or 4.91%, lower on Friday.

Credit Suisse analyst Christopher Ceraso said in a report that the impact of accounting errors on supplier credits - which boosted after-tax income by about $200 million in 2001 - and leased vehicles - which boosted earnings by $150 million in the first quarter to 2005 - suggest that the SEC may "pursue further enforcement actions."

But General Motors' decision to increase the charges related to its North American restructuring and the contingent liabilities related to workers affected by its plant closures could also mean that the Detroit auto maker is closer to a deal with the union, "which in our view, is one of the most significant daunting issues overhanging GM and the rest of the sector," Ceraso wrote.

A sell-side analyst said the restatements were "clearly a blow to the credibility of General Motors' management."

"A lot of people already have the impression that they're starting to lose control on their end, and this just affirms what they're thinking," he said.

But he said people had already discounted for the company's troubles, and the restatement "doesn't really appear to have been a big negative for the credit, things are already up in the air as it is," he said.

Time Warner Telecom plans new deal

Time Warner Telecom plans to offer $200 million of 20-year convertible bonds talked to have a coupon between 2.125% and 2.625%, with an initial conversion premium between 25% and 30%, market sources confirmed.

Morgan Stanley, Wachovia Securities and Deutsche Bank are the bookrunners.

There is a greenshoe option of $30 million, and pricing is expected on March 23 after the close.

Time Warner Telecom, a Littleton, Colo.-based IT services company that manages data and voice networks, said the proceeds of the deal will be used to call for redemption a portion of its 10.125% senior notes due 2011.

Also on Friday, Time Warner Telecom's major shareholders Time Warner Inc. and Advance/Newhouse said they would sell 17.5 million Time Warner Telecom shares in a public offering, with an over-allotment option of a further 2.6 million shares. Those shares represent about 17.2% of Time Warner Telecom's share capital. Deutsche Bank, Morgan Stanley and JP Morgan are the bookrunners for the stock offering.

Converts outperform underlying stock

Convertible bonds in the U.S. markets rose for the fifth straight session on Thursday, said a report by Merrill Lynch equity-linked analyst Marc A. Malloy and Debrah Yaw.

Their index of all convertibles returned 0.23% on Thursday, compared to just 0.09% for the underlying stock, although the convertibles are returning just 1.09% month-to-date compared to 1.65% for the stock.

Speculative-grade convertibles have outperformed investment-grade convertibles, returning 1.32% so far this month compared to 0.72% for the investment-grade convertibles.

So far this year, total returns on convertibles stand at 5.01%, compared to 7.06% for their underlying stocks.

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