Bear Stearns: Several convertibles cheap versus their high yield bonds

By Ronda Fears

Nashville, Tenn., March 4 - There are several convertibles trading cheap relative to their high-yield spreads, said Bear Stearns & Co. head of convertible research Yaw Debrah in a valuation analysis report Monday. The report also identified several cheap put plays.

There are roughly 50 names in the convertible universe that have outstanding straight high-yield bonds, Debrah said. Those with convertibles trading cheap included Adelphia Communications, Amkor Technologies, Amazon, CKE Restaurants, Loral Space & Communications, Mailwell Inc., NTL Inc., Pride Petroleum, Parker Drilling, Range Resources, Royal Caribbean, Sinclair Broadcasting and Solectron Corp. There is also a cheap put play for Royal Caribbean, which was highlighted in the report.

"The high yield market gives us a benchmark against which to measure the observed spreads in the convertible market. In calculating a theoretical investment value from the high yield spreads, we have added a premium to the spread to account for the subordination of the convertibles to the high yield bonds," Debrah said in the report.

Investors will need to evaluate the correctness of the subordination premium assumption, among other factors, before determining the overall cheap/richness of these issues, the analysts emphasized. Also there may be differences in bond structure, duration and maturity that may account for some differences in spreads relative to a company's corresponding high-yield bond.

The Bear Stearns high-yield index last week returned a market weighted gain of 0.17%, which was the first week of positive returns after four consecutive weeks of losses, Debrah noted. The year-to-date total return improved to a 0.70% decline and, excluding telecom, is now up 1.20%. In all but one of the past six months, the non-telecom portion of the composite has outperformed the telecom sector. Wireless issuers have been pressured as customer concerns have mounted over downward adjustments in growth forecasts, the analyst noted, but many have seen a rally recently.

Also, the convertible market richened during the week, moving to a discount to theoretical value of 3.9% from a 4.3% discount as stronger than expected economic data boosted investor sentiment. Government reports on factory activity, personal spending, durable goods and economic growth, combined with comments from Fed Chairman Alan Greenspan, shored up confidence the rebound will revive profit growth.

Spreads on issues in the Bear Stearns High Yield Index also improved, from 841 to 838 basis points on the week. Spreads have now been relatvely flat at about 840 basis points since the beginning of December.

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