Lehman analysts: Teva tranche D convertibles now look better to buy

By Rebecca Melvin

New York, March 13 - Teva Pharmaceutical Industries Ltd.'s tranche D convertibles are now more attractive from a convert valuation perspective and are recommended to buy for both outright and arbitrage investors, according to a report published Thursday by Lehman Brothers convertibles research.

The research follows a Feb. 27 report in which Lehman recommended selling into strength the Teva Ds, or 1.75% convertibles due 2026, because of valuation concerns.

The bonds were then quoted at an implied volatility of 35.6%, which was 9.6 points richer than like strike, like maturity listed implieds. The bonds have come out significantly since then, the report said.

Teva Ds are now more attractive for outright investors seeking longer-term fundamental exposure to Teva, and for arbitrage investors, who shorted the Teva Ds in line with the Lehman analysts' earlier recommendation.

Covering short positions is now recommended since the bonds have come in significantly and the richness relative to listed implieds is now more reasonable at 2.7 points.

In the two weeks since the last report, implied volatility declined by 5.2 points; like strike, like maturity implieds have risen 1.7 points to 27.7 points; the spread between the convert and listed implieds has declined from a high 9.6 points to a more reasonable 2.7 points; and the bonds are now quoted 3.1 points lower than the estimated level if the implied volatility had remained unchanged at 35.6 points, and 2.3 points lower than the estimated dollar neutral level.

Finally, while Teva stock has declined by 5.35%, the premium has remained nearly unchanged and is now at 23.53%, or 21.56 points.

Petach Tikva, Israel-based Teva is a generic drug maker.

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