Charter 5.75% convertible offers equity-like returns, Bear Stearns says

New York, May 2 - Bear Stearns & Co. analysts are recommending Charter Communications' 5.75% convertible debentures due 2005 (B+/B3), saying the security offers equity-like returns in a sector that is currently out of favor and an attractive risk/reward profile.

At the recent price of 80.5 versus a stock price of $8.40, the 5.75% offers a yield to maturity of 12.95%, notes Bear Stearns analyst Sarah Gallagher in a new report. The conversion premium is 106.62%.

"Due to the security's high yield, you get a very attractive risk/reward profile," Gallagher wrote.

By Bear Stearns' calculation, the convertible will give 61% participation if the equity rises 25% over the next year but only 6% participation in a 25% loss in the equity.

Gallagher also noted that as a senior security the convertible debenture ranks much higher than the underlying equity "in the unlikely event of company default."

She added that Charter recently reported "solid" operating results and reiterated guidance for full year 2002. Pro forma first quarter revenues increased 13.1% while pro forma EBITDA (earnings before interest, taxation, depreciation and amortization) gained 10.4%.

While the convertible has a single B rating from both agencies, Gallagher said Charter management is still targeting an investment grade rating by the end of 2004.

For liquidity, the company has a $3 billion credit facility with 90% available at the end of the first quarter.

Bear Stearns equity analyst Ray Katz estimates Charter will have roughly $1.9 billion in availability at year-end 2002 and $1.3 billion at year end 2003.

"In short, it is our belief that Charter is sufficiently funded until it turns free cash flow positive," Gallagher wrote.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.