Citigroup adds new RF Micro Devices convert to recommended portfolio

By Ronda Fears

Nashville, June 26 - Citigroup on Thursday added RF Micro Devices Inc.'s new 1.5% convertible due 2010 to its recommended portfolio, and recommended investors sell the old 3.75% convert due 2005 on its recent rally.

"Given the appreciation in RFMD 3.75%-05 to roughly 99-100, we are recommending clients sell RFMD 3.75%-05 and buy RFMD 1.5%-10," said convertible analyst Lynn Hambright in an email bulletin Thursday.

The existing 3.75s experienced a sharp runup on the new issue, due to anticipated buyback or a call exercise. It is callable Aug. 20 at 100.935

Using a credit spread of 550 basis points over Treasuries and a 55% stock volatility, she said the new 1.5% convert models out 1% cheap, "and given the recent decline in the shares, we believe we could see appreciation due to equity sensitivity."

Hedged investors, she added, at a 75.2% hedge, could own the bonds at 43.0303 should, hypothetically speaking, the shares go to $0.

Whereas outright investors would own the bonds at 100, the analyst said RF Micro Devices would have to burn through some $231.185 million of cash plus suffer another $326.215 million of asset impairment or decline before the holding would be at risk. However, the 75.2% hedge investor could be able to endure an additional $199.40 million of asset impairment or decline before being at risk.

"Given the above back-of-the-envelope hypothetical scenario, we suggest both the outright investor and the 75.2% hedge investor have ample downside protection regarding credit," Hambright said.

On the upside, a conversion price of $7.6296 with the shares selling at $5.78 allows for equity participation.

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