Beverly bounces on auction plans; GM skid marks touch off slide in American Axle, Lear; 2 deals out

By Ronda Fears

Nashville, March 22 - General Motors Corp. just wouldn't take a backseat to the Federal Reserve action Tuesday, as the quarter-point interest rate hike came as no big surprise to the markets. But with the cost of capital on the rise, GM credit came under even more pressure because of the loss of its $2 billion line of credit used to pay suppliers in advance.

That, in turn, caused some auto suppliers like American Axle & Manufacturing Holdings Inc. to sink. But traders said traffic in GM convertibles was showing good two-way action as buyers stepped into the picture.

Moreover, convertible players from every corner of the market said it was a brutal session, with virtually everything moving southerly.

Yet, Beverly Enterprises Inc. convertibles were described as 2 to 3 points better on the Fort Smith, Ark.-based nursing home company deciding to put itself on the auction block in an effort to stave off a hostile bid that has overshadowed the story for the past six weeks.

A bearish M&A tone from consulting and outsourcing firm BearingPoint Inc.'s new chief executive, Harry You, who is considered a deal whiz, drew a mixed reaction from convertible holders with the 2.5% issue sliding 0.125 point and the 2.75% issue gaining 0.25 point.

Vornado reoffered at 98-98.5

New York developer Vornado Realty Trust, which is a player in the bid for Toys 'R' Us Inc., sold $500 million of convertibles with a 3.875% handle, up 30%, and sole bookrunner Citigroup Global Markets was reoffering it in the overnight at 98 to 98.5, according to market sources.

"We see it lower than that [98-98.5]. Vornado is a big player in the real estate game, though, and a lot of people will probably pay up for some of that," said a buyside analyst.

"More than anything, there's probably some people expecting this to be a vol [volatility] play. We're not in that game. There doesn't seem to be a lot of dividend protection and they already pay 4.25% on the common, so we're probably going to pass for now."

Vornado shares on Tuesday dropped $1.25, or 1.75%, to close at $70.25.

Books on the registered deal will close at 9 a.m. Wednesday.

Vornado seen reworking Toys

Vornado is part of the consortium of bidders, along with Kolberg Kravis Roberts and Bain Capital, to buy Toys 'R' Us Inc. in a $6.6 billion deal.

"The TOY connection is a plus," said another buyside source.

Proceeds will be used for working capital and other corporate purposes, Vornado said, but convertible players were anticipating that the real estate developer would be in charge of "revamping non-producing Toys 'R' Us properties and turning a buck or two," as a sellside onlooker put it.

New York-based Vornado owns all or portions of the prime office space in Manhattan, as well as Washington, D.C. and northern Virginia areas, plus retail properties in seven states and Puerto Rico.

Amid market speculation that Vornado would become a rival bidder for Sears, Roebuck & Co. to Kmart Holdings Corp.'s $12 billion play for the department store chain, Vornado silenced the buzz Monday when it said it would vote its 4.3% of Sears stock in favor of the Kmart acquisition. That buzz took root on Vornado's history of making a play for retailers, as the company made a failed bid for Target Corp.'s Mervyns chain last year.

"The Toys 'R' Us situation is much like its play for Mervyns, which was seen purely as a real estate purchase," the buyside source said.

Cal Dive to price with PNM

Houston-based deepwater drilling oilfield services company Cal Dive International Inc. put $240 million of 20-year convertible notes talked to yield 2.875% to 3.375% with a 41.5% to 46.5% initial conversion premium on to price after Wednesday's close alongside PNM Resources Inc.

Cal Dive said proceeds would be used to make a contribution to its 50/50 joint venture Deepwater Gateway LLC for early debt retirement, capital expenditures and potential acquisitions. Cal Dive shares closed Tuesday up $1.05, or 2.17%, at $49.39, but in after-hours trading news of the deal sent the stock lower by $1.14, or 2.31%.

PNM's $215 million mandatory, which is talked with a dividend of 6.5% to 7.0% and initial conversion premium between 18% and 22%, also is pricing after the close Wednesday alongside 3.4 million shares of common stock, with proceeds earmarked in part to retire debt assumed in its $1.024 billion acquisition of TNP Enterprises.

PNM Resources shares on Tuesday lost 34 cents, or 1.25%, at $26.86.

ACE Aviation for next week

Air Canada and Jazz parent ACE Aviation Holdings Inc.'s C$250 million of 30-year convertible senior notes is being talked with a coupon of 4.25% to 4.75% with a 22.5% to 27.5% initial conversion premium. The deal is for next Tuesday's business.

ACE Aviation also is selling C$350 million of stock, with proceeds from both deals earmarked to refinance the C$540 million credit facility from GE Capital Corp. used as bankruptcy exit financing last September. Buyers of the stock in Canada will receive class B voting shares. Buyers in the U.S. will receive class A variable voting shares.

Montreal-based ACE Aviation also said that Air Canada had obtained commitments from a bank syndicate led by the Bank of Montreal for a new C$300 million two-year revolving credit facility, subject to the completion of the equity offering. After the transactions, ACE Aviation said it will have cash and committed credit facilities of C$2 billion with net debt of about C$4 billion. On Sunday, the company reiterated its 2005 EBITDA forecast for C$1.6 billion.

On Tuesday, ACE Aviation class B shares closed up C$1.15, or 3.3%, at C$36.00 and the class A shares up C$1.06, or 3%, at C$36.00 on the Toronto Stock Exchange.

GM short credits on the skids

Flow in GM convertibles was running both ways as buyers hopped aboard while outright and retail holders continued to sell out. But traders said the signs still pointed to lots of pressure on the credit as GE Capital Corp. reportedly withdrew a $2 billion loan facility to GM.

Some players were gambling to reverse the drain on returns from the dive in GM paper by taking a position in the automaker's short-dated paper but found that even that was an uphill climb as the story got even uglier Tuesday.

"We had a 'short' credit trade that worked really well after GM blew up, but unfortunately, we gave it all back on everything else collapsing around us! Oh well, at least it beats losing money," one buyside holder said.

"The short-dated paper wasn't short enough," he said, to outrun the gaping spread widening the credit took again Tuesday on reports from London in the Financial Times that GECC had pulled the line of credit and now GM will have to provide its own factoring, or early payment, to suppliers.

Now, GM will have to raise the funding, most likely through its General Motors Acceptance Corp., thus increasing pressure on its liquidity, which has been the stabilizing force for GM as auto sales have continued to slip.

GECC's facility with GM allowed it to pull out after the negative outlook was placed on its BBB- credit rating last week in response to a first-quarter net loss warning and lowered 2005 earnings guidance.

Later in the day, GM and GE issued a joint clarification - indicating that GE had told GM as far back as last May that it was planning on leaving the trade receivables business at the end of 2005 - a decision apparently unrelated to the current difficulties of GM or other carmakers. GM then set the wheels in motion to have its GMAC Commercial Finance arm take over funding such early pay programs, with GE Capital continuing to find the receivables facility until the GMAC funding is ramped up.

Axle, Lear crack on GM news

Even though GM has $23 billion of cash and securities and said none of the remaining $9 billion of bank loan facilities available to its automotive unit had credit rating triggers that would jeopardize that funding, suppliers for GM were punished by the news Tuesday.

In addition, one sellside analyst pointed out that GMAC has another $24 billion of cash and $64 billion of committed credit lines, "but today everything was getting tossed out, anything remotely connected to GM. The GECC news was really a bad sign."

American Axle took the hardest hit, as a big part of its business comes from GM. The company makes axles, driveshafts and chassis components for light trucks, SUVs, and passenger cars, getting some 86% of its business from GM; in fact, the company is the sole-source supplier to GM for certain axles.

The American Axle 2% convertibles dropped around 2 points to the neighborhood of 80.125 on the news, although the underlying stock spent a majority of the day higher due to short covering. The stock ended, though, unchanged at $24.75.

Lear Corp., which makes seats and other interior components for vehicles for GM and other automakers, also reacted to the latest GM news but to a lesser extent than American Axle because not so much of its business depends on GM. In addition to contracts with several other car manufacturers, Lear also makes seats for aircraft.

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