By Ronda Fears
Nashville, May 16 - The implied credit spread differential between Infineon Technologies AG's new euro convertible and Micron Technology Inc.'s recent convertible makes the Infineon issue look considerably cheap. Thus, Deutsche Bank Securities analysts suggest switching into Infineon from Micron, or shorting Micron's issue against Infineon's.
In the U.S., analysts Jeremy Howard, Jonathan Cohen and Robert Barron contributed to a report on the subject Friday. In London, analysts Clodagh Muldoon and Bruno Gargiulo contributed.
"Given Infineon and Micron's comparable profiles, and Infineon's superior position with regard to diversification, liquidity and cost structure, we see no reason for these two names to be trading on such a large implied credit spread differential," the analysts said.
"We suggest that investors take advantage of this current anomaly either by switching from one to the other or by shorting MU 2.5% 2010 against IFX 5% 2010."
Recent issues from tech names like Infineon and ASML Holding NV have focused investors' attention on the valuation differential between U.S. and European convertibles, the analysts pointed out.
"Although some U.S. investors have experienced pain in Europe over the past 18 months, we believe there is now an opportunity for U.S. investors to look again at European valuations relative to comparable U.S. convertibles," they added.
Two weeks ago, German semiconductor company Infineon sold a €700 million seven-year par/par structured convertible. On current valuations (103.938), with a stock volatility of 55%, it is trading at an implied credit spread of 728 basis points over Libor.
In January, Micron, a U.S. semiconductor company with a similar business profile, issued a seven-year convertible. At that time, Deutsche analysts valued it with a credit spread of 700 bps over Libor and a stock volatility of 65%. At current levels (115.375), with a stock volatility of 60%, it is trading at an implied credit spread of 488 bps over Libor, significantly tighter than at issue as well as Infineon's convertible.
If the Infineon convertible tightened similarly, say to an implied credit spread of 500 bps over Libor, and a 55% volatility, the analysts noted its theoretical value would rise some 7 points to 110.99 versus €6.98.
Infineon 5% euro convertible due 2010
| Ask: | 103.938
|
| Equity price: | €6.98
|
| Conversion price: | €10.23
|
| Parity: | 68.2
|
| Premium: | 52.40%
|
| Yield: | 4.336%
|
| Stock volatility: | 55%
|
| Implied spread: | L+728 bps
|
| Call: | May 1, 2006
|
| Call price: | 100
|
| Call trigger: | 125%
|
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