By Ronda Fears
Nashville, May 12 - Merrill Lynch is recommending the Liberty Media Corp. 3.75% exchangeable due 2030, which converts into Sprint Corp. stock, as a yield alternative offering a position in an investment-grade credit with an attractive current yield.
Several of Liberty's exchangeable convertibles offer more value than even the cheapest part of Liberty's bullet debt curve, making them some of the cheapest instruments in Liberty's capital structure, the convertible analysts said in a report. Liberty Media has five exchangeable securities outstanding - the Sprint 3.5% issue due 2030, another Sprint 4% issue due 2029, Motorola Inc. 3.5% due 2031, Viacom Inc. 3.25% due 2031 and Time Warner Inc. 0.75% due 2023.
The 3.75% issue is the most attractive, the analysts said, hence it was added to Merrill's recommended convertible portfolio.
Convertible analysts at Merrill noted that the firm's fixed-income strategy team views both of the Liberty exchangeables that convert into Sprint stock more attractive to the long bullets of Liberty given the low dollar price and the added stock option. The strategists estimate the 3.75% issue trades $8.68 cheap to its theoretical value, which the convertible analysts said makes the dollar price adjustment virtually "free."
The convertible was originally exchangeable into shares of Sprint's tracking stock, PCS, when shares of PCS were trading at $106. Since then, the equity price has declined significantly and the bonds are considered busted and trade just like Liberty's straight debt.
On Feb. 29, Sprint announced that it had decided to recombine the PCS tracking stock and return to a single common stock. On April 23, PCS common stock was eliminated by converting each share of PCS into 0.50 shares of Sprint.
According to the issue's prospectus, given that the debentures are now linked to the dividend-paying Sprint common stock, interest payments will be increased by the amount of regular cash dividends payable to a holder of 8.3882 shares of Sprint stock, assuming the company continues to pay a regular common dividend.
Therefore, in addition to the regular semi-annual payments of $18.75 per debenture, the convertible analysts said holders also should receive payments of about $2.10 per debenture.
Liberty/Sprint 3.75% due 2030
| Price: | 66.38
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| Stock Price: | $17.95
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| Premium: | 340.86%
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| Payback period: | 27 years
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| Current yield: | 5.65%
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| Call: | Currently at 100
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| Ratings: | Baa3/BBB-
|
| Annual equity vol: | 33.9%
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| Stock div. yield: | 2.786%
|
| Credit spread: | 162 bps over 5-year Treasury
|
| Delta: | 0.063
|
| Implied volatility: | 21.02%
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