By Ronda Fears
Nashville, Tenn., Nov. 15 - Salomon Smith Barney convertible analyst Lynn S. Hambright said the best near-term strategy on Arrow Electronics Inc.'s convertible is for outrights to exit on the recent rally. Or those who can should buy credit default protection.
"As credit spreads have tightened significantly in the last few weeks, partially due to a rally in investment-grade credits further enhanced by large CDO buyers, we recommend that clients use this to their advantage," Hambright said in a report Friday.
"For outright clients, we do not think the convertible bond metrics look appealing at current levels. We would use the rally to strategically exit the position."
Salomon believes the implied credit spread of 580 basis points is too tight given the current uncertain environment, coupled with Arrow's changing business model. Hambright said 800 over would be better.
"For clients who can purchase credit default protection, we recommend this option," Hambright said.
Currently, she said, the price of credit default protection for Arrow is roughly 475-525 basis points. The convert trades at 580 over, she noted.
"We realize that some investors trade this convert moderately wider than the equivalent corporate bond and, additionally, we are not blind to the current, positive market environment," Hambright said.
"As such, we recommend clients take care to balance our individual company concerns with the bigger picture."
Arrow Electronics 0% convertible due 2021
| Convertible price: | 43.5
|
| Common price: | $13.88
|
| Current yield: | 0%
|
| Yield to maturity: | 4.61%
|
| Yield to put: | 7.42%
|
| Put: | Feb. 21, 2006
|
| Put price: | 55.208
|
| Fair value: | 43.5
|
| Credit spread: | 580 basis points
|
| Volatility: | 45%
|
| Conversion premium: | 161.8%
|
| Conversion price: | $37.829
|
| Conversion ratio: | 11.9720
|
| Ratings: | Baa3/BBB-
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