Lehman convertible analyst mixed on CSX put sweetener

By Ronda Fears

Nashville, Oct. 28 - The sweetener offered by CSX Corp. to avert the upcoming put on its convertible evoked mixed feelings from Venu Krishna, head of U.S. convertible research at Lehman Brothers.

On Monday, CSX offered an incentive to holders of its 0% convertible due 2021 in the form of a one-time cash payment plus an extra put date in an attempt to avert the $460 million put coming due on Thursday. Investors choosing to exercise the put option had to indicate their intent by last Friday, but had until the close of business Tuesday to withdraw it.

The company is offering an additional put on Oct. 30, 2005 at 85.248% and a one-time cash payment of 2.3 points per bond, or roughly $12.65 million, to holders who choose not to exercise the put.

"Our views on the incentive offer are mixed," Krishna said in a report Tuesday.

"While the incremental value created via the incentive is minimal, holders who decide not to put will continue to own a solid credit and highly defensive instrument, given the new put in 2005, with the potential to benefit should volatility see a spike.

"However, should stock drop below the ... $29.00 threshold level after Tuesday but before Thursday, holders will not have the ability to exercise the put due to the Tuesday deadline."

Lehman estimates the value of the extra 2005 put to be worth 2.18 points. Combined with the 2.3 points cash incentive, the incremental value created relative to the put price of 83.565 is about 0.30 points. In other words, the fair value of the convert taking into account the incentive offer would be 83.863.

After factoring in the incentives, Lehman estimates the put exercise threshold level on CSX stock - or the breakeven point - to be $29.00. Below that level, holders would find exercising the put more economical versus accepting the incentive package.

Krishna expects the CSX convert to trade down to the 81.56 level once the cash incentive is paid out, suggesting a 2.24% yield-to-put with a 52% premium.

The assumptions are based on a Libor plus 50 basis points spread and 22% stock volatility.

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