By Ronda Fears
Nashville, Tenn., Oct. 7 - JPMorgan is recommending the Starwood Hotels & Resorts Worldwide Inc. 0% convertible due May 2021 for yield investors, and also suggests selling 2004 default protection on a wide spread.
The Series B 0% convert is putable on May 25, 2004.
"Based on our review of the company's fundamental credit quality and capital structure, we believe the market prices for the company's pari passu straight debt send a clear message: at their simple yield to put of 8.8%, (707 basis points spread, or 164 basis wider than 2005 straight debt), the Ba1/BBB- rated converts compensate holders well given their short, 20-month maturity," said Alex Robinson, convertible analyst at JPMorgan, in a report Monday.
Two near-term catalysts should propel Starwood's debt, including the converts, to a higher valuation, the analyst said. Those are the senior credit facility refinancing that is expected soon and the pending sale of CIGA Spa assets.
Starwood's $1.25 billion of bank debt expires before the end of second quarter 2003, but Robinson said the refinancing is expected soon, perhaps in a matter of days.
In addition to the €350 million of asset sales already announced, CIGA has €1.3 billion of remaining assets still for sale.
"We believe the corporation's fundamental credit strength is sufficient to sustain the Ba1/BBB- credit rating of the converts despite negative outlooks from both ratings agencies," Robinson said.
Robinson said the convert is about 2.4% cheap due to mis-valuation on the credit, and the credit default swap spreads for July 2004 are also wide.
"In our view, the appropriate assumption for the Series B Zero Coupon Convertible Senior Notes credit spread to U.S. Treasury Securities is approximately 600 basis points, while the 90-day volatility assumption should be 40%. Using these assumptions, the Series B Zero Coupon Convertible Senior Notes have investment value of 51.17, and appear to be priced about 2.4% cheap," Robinson said.
"Alternatively, we recommend investors sell July 2004 default protection, which at 675-750 basis points versus the swap rate appears wide, in our view."
Last 12-months leverage at June 30 was 5.5 times, slightly higher than the 3.8x ratings agencies likely consider a threshold for stable Baa3/BBB- ratings in the lodging sector. This number should improve, Robinson said, once fiscal third and fourth quarter 2001 weak results are left behind, barring additional terrorist attacks or the outbreak of war in the Middle East.
Starwood 0% convertible due May 2021
| Price: | 50.25
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| Stock price: | $21.42
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| Current yield: | 0%
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| Spread: | 709 basis points
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| Credit default swap bid: | 675 basis points
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| Credit default swap ask: | 750 basis points
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| Conversion ratio: | 10.195
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| Conversion premium: | 130.1%
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| Parity: | 21.84
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| Yield to maturity: | 3.73%
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| Yield to put: | 8.81%
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| Ratings: | Ba1/BBB-
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