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GM convertibles offer attractive relative value compared to common stock: Lehman report
By Rebecca Melvin
New York, June 27 - General Motors Corp.'s three senior convertible bonds with a total face of $8.4 billion and a total market value of $5 billion offer attractive relative value compared to the common stock for those looking for exposure to the Detroit car company, Lehman Brothers said in a research note published Friday.
The common stock declined to a multi-year low on Thursday to close at $11.43.
In addition, credit spreads have risen significantly to their multi-year highs - higher than the levels seen in the auto sell-off in 2005, the Lehman note stated.
The 1.5% convertibles due June 2009 (GRMs) mature in 0.9 years, with a yield to maturity of 18.3%. But Lehman's analysis focused on the 5.7-year put of the 5.25% convertibles due 2032 (the GBMs) and the 10.1-year put of the 6.25% convertibles due 2933 (the GPMs).
Analyzing the relationship between credit and stock price movements, Lehman concluded that for a 20% move in common stock plus or minus over one year, the upside/downside participation for the GPMs is 97%/28% and for the GBMs it's 112%/23%.
"We haven't factored in any potential common dividend cuts in our analysis. The converts would look even more attractive relative to common should this happen," the research note stated.
The delta on the GBMs is 27% while for the GPMs it is 52.5%. For the 1.5% GRMs, the delta is 2.5%.
Gamma for the GBMs and GPMs is nearly the same at 0.30% and 0.32%, respectively. While for the GRMs, it is 0.12%.
The Vega is 0.02%, 0.03% and 0.12% for the Bs, the Ps and the Rs, respectively.
And finally, the Rho is negative 0.53 and 0.55 for the Bs and Ps, respectively and negative 0.19 for the GRMs.
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