Wachovia says buy Nextel as spreads contract swiftly

By Ronda Fears

Nashville, Jan. 14 - With spreads coming in on Nextel Communications Inc. faster than expected, Wachovia Securities, Inc. analyst Jeanine Oburchay urged convertible investors to continue buying the convertibles.

"As the company continues to delever, we believe the convertibles' credit spread will approach that of the high yield (tightening from 850 today)," Oburchay said in a research note Tuesday.

Last month in an intra-day note, she said her assumption of 800 basis points for Nextel's credit spread may prove to be conservative as fundamentals improve.

"The company's straight-debt spreads moved faster than we expected, and now the 9.375% senior notes due 2009 are bid around $97.50, or Treasurys plus 638 bps," the analyst said.

"We believe this is a positive signal for the convertibles, which are still trading at an implied credit spread well above the straights (at roughly 850), despite the fact that these bonds (all three) are pari passu with the senior debt."

With Nextel common at $14.25, the 4.75% convertibles due July 2007 were at 95, the 5.25% convertibles due January 2010 at 79.25 and the 6% convertibles due June 2011 at 97.

Versus the stock at $14.50, the 4.75s closed at 95.5 bid, 96 asked, the 5.25s at 77 bid, 78 asked and the 6s at 98 bid, 98.5 asked.

Nextel shares closed up 36c to $14.57.

Investors should continue to buy the Nextel converts, she said, noting that Wachovia maintains a $19 12-month target price on the stock based on a discounted cash flow model using a 14% discount rate and 8x terminal multiple. She added that investors who have the risk tolerance for equity should own Nextel's stock, which has the best upside.

Oburchay tightened the credit spread to 650 basis points on the converts but kept the volatility assumption at 60%, noting "the volatility will come in as and when the stock moves closer to our price target, although the perceived and realized improvement in credit quality will likely offset lower volatility."

Of the convertibles, the 6s have the best upside, given the call protection, if the stock should nearly double to $28 over the next 12 months, she said.

The 5.25s are best for conservative outright investors who believe the stock is fairly valued and want to own the lowest dollar price bond, she said.

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