Smithfield Foods jumps to 103 on debut; GM, Ford slide; Coal names drop with stocks; Amgen adds

By Rebecca Melvin

New York, July 2 - Smithfield Foods Inc.'s new 4% convertible bonds jumped upon release to the secondary market Wednesday, trading at 103 out of the gate and seeing good action at that level, before quieting, along with the overall convertible market, during the second half of the session, a syndicate source said.

Smithfield priced $350 million of five-year convertibles despite a sharp 12% drop in its underlying shares on Tuesday. Shares opened higher on Wednesday but slipped into negative territory by afternoon.

The convertible bonds of General Motors Corp. and Ford Motor Co. fell amid a steep selloff of GM shares after Merrill Lynch cut its GM rating to "underperform" from "buy" and reduced its equity price target to $7, citing liquidity concerns and dangers related to further worsening of the economy.

The B-word was thrown around a lot in the market as GM shares tumbled to a close of $9.98.

Several convertible names in the coal sector fell as lower coal prices put pressure on shares. Shares of Alpha Natural Resources Inc. plunged 16% to $87.62, with the convertibles in trade earlier in the session at 190 versus a share price of $94.00.

Patriot Coal Co.'s stock sank nearly 15% to $129.72, with the convertibles trading at 130 versus a stock price of $135 earlier in the day.

Peabody Energy Corp. shares ended down 9.3% to $77.90, with its convertibles changing hands in the morning at 154.5 versus a share price of $80.00.

Amgen Inc. convertibles were active again, and higher in line with its shares, as speculation continues regarding whether the Thousand Oaks, Calif.-based biotech giant's future is all rosy or has some black spots.

Traders were also trying to make a market in Wyeth, Microchip Technology Inc. and Ciena Corp., sources said.

Overall the market was thinly traded and a little weaker, with "more red than green" on the screen, a New York-based sellside desk analyst said.

GM, Ford maneuverability in question

The GM 6.25% convertibles due 2033 (NYSE: GPM) closed down 99 cents, or 7.4%, at $12.32 in heavy volume versus a closing stock price of $9.98. That compared with $13.31 versus a stock price of $11.75 at the close Tuesday.

In slimmer volume and tallying a smaller decline, the GM 5.25% convertibles due 2032 (NYSE: GBM) dropped 83 cents, or 5.9%, to $13.96 versus a closing stock price of $9.98. That compared with $13.96 versus a stock price of $11.75 on Tuesday.

The shorter dated GM 1.5% convertibles due June 2009 (NYSE: GRM) closed down 67 cents, or 3.1%, at $21.00, in heavier-than-average volume.

The moves weren't as damaging at the stock's plunge. Shares of the Detroit-based carmaker (NYSE: GM) sank $1.77, or 15.1%.

A Merrill analyst published a report Wednesday that posited that GM is burning through cash faster than investors realize and that bankruptcy isn't out of the realm of possibility if the market worsens and the company can't raise enough capital. More than $10 billion is expected to be needed, according to sources.

Merrill complimented GM's restructuring efforts but said a faster-than-expected drop in sales will contribute to a rising cash burn rate and evaporating profit potential.

Merrill lowered GM's 2008 light vehicle sales estimate to 14.3 million cars and trucks, down from 14.8 million.

"The weakness in demand and deteriorating mix through the first half of 2008 are just the beginning of what is shaping up to be a more severe downturn than even the most bearish industry observers expected," the Merrill analyst John Murphy wrote.

Ford Motor followed its larger rival lower, but on much less volume. The Ford 4.25% convertibles due 2036 fell between 1.5 points and 2 points to 68, down from 70 to 70.5 on Tuesday. Shares of the Dearborn, Mich.-based automaker (NYSE: F) fell 35 cents, or 7.4%, to $4.36.

Coal price correction causes drop

Alpha Natural's 2.375% convertible due 2015 fell 22 points outright, the most amount among a handful of coal names, but it was Peabody Energy's 4.75% convertible due 2066 that made the largest move on a dollar neutral basis.

The Peabody convertibles closed down 13 points to 150.18 versus a share price of $77.90, compared to 163.39 versus a share price of $85.89 on Wednesday. Shares of the St. Louis-based company closed near its lows for the day.

The Alpha Natural convertibles - $287.5 million of them priced in early April - were seen closing at 182.5, down 22 points outright from 204.1, compared to a 16% drop in the shares of the Abingdon, Va.-based coal company (NYSE: ANR) to $87.62.

The notes became convertible on Tuesday because the common stock exceeded the conversion threshold price of $71.06 per share, which is 130% above the conversion price of $54.66 for at least 20 trading days within the 30 consecutive trading days ended June 30.

"Coal stocks had a big down day. There had been a huge run up in coal prices, and it looks like they are taking a breather," a sellside analyst said of the sector, which closed near its lows for the day.

The benchmark European coal price dropped from around $225 per ton to below $200, which in turn dragged down U.S. prices by as much as $20. Prices had been rising sharply in the last several weeks, and taking stock and bond prices higher along with them.

Patriot Coal, also based in St. Louis, saw its 3.25% convertible senior notes due 2013 close at 127.9, down almost 10 points, versus a closing stock price of $129.72, a 15% stock decrease. The shares (NYSE: PCX) fell $22.72.

Amgen action continues

Amgen bucked the general trend in its sector in equities, ending up fractionally when most others were lower.

The convertibles were also higher, with the Amgen Inc. 0.125% due February 2011 trading at 92 versus a share price of $49.00, compared to 91.5 versus a share price of $48.64 on Tuesday.

The Amgen 0.375% convertible due February 2013 traded at 88.49 versus the $49.00 share price, compared with 87 at the close on Tuesday.

The name has been in active trade for the last week or more, with the stock gaining. "If nothing else, people are going to start to take a look at some of these better quality names, especially those with little correlation with economic growth prospects," a sellsider said.

But short interest has been increasing in the name as well. Speculation includes the possibility that the Food and Drug Administration may issue new restrictions on the use of Amgen's anemia drugs in cancer patients.

Investors are also eyeing data expected later this year on Amgen's important osteoporosis drug D-mab.

Shares of Amgen (Nasdaq: AMGN) closed up 20 cents on Wednesday, or 0.4%, at $48.84.

Smithfield serves up a nice dish

The Smithfield Foods 4% convertibles traded initially at 103.625 and were seen right around 103 versus a stock price of $17.25 near mid-session. Shares of the Smithfield, Va.-based pork processing and packaging company (NYSE: SFD) closed lower than that level at $17.00, down 45 cents, or 2.6%.

"We were pretty active in those all morning," a syndicate source said.

The deal came at the middle of price talk, which was for a yield of 3.75% to 4.25% and an initial conversion premium of 27.5% to 32.5%. With those inputs the deal was seen cheap by analysts on Tuesday.

Citigroup, Goldman Sachs & Co. and J.P. Morgan Securities Inc. were joint bookrunners for the registered offering, which is non-callable for five years and has no puts.

Smithfield plans to use proceeds for paying down short-term and revolving credit.

A $45.1 million portion of proceeds will go to set up hedge and warrant transactions that Smithfield expects to enter into with affiliates of certain underwriters. Those transactions will raise the effective conversion premium from Smithfield's point of view to 75%.

Receipt of net proceeds from the offering would also result in termination of the commitments of the lenders under a bridge facility that Smithfield put in place pending the sale of its beef operations, a transaction it expects will close during its 2009 fiscal second quarter.

Related to the warrant transactions, there will be a concurrent issue of 7 million shares being sold to Starbase International Ltd., a subsidiary of Cofco.

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