Merrill convertible analysts recommend swapping out of Charter into AT&T/Cablevision

By Ronda Fears

Nashville, Tenn., Dec. 4 - Merrill Lynch & Co. convertible analysts recommend switching into AT&T/Cablevision's 6.5% mandatory convertible preferreds in place of the Charter Communications 4.75% convertible bond, noting the AT&T issue provides significant upside exposure to a buy-rated stock while the 5.7% current yield lends support on the downside.

"We are initiating a relative value exchange for the AT&T/Cablevision 6.5% mandatory convertible preferred in place of the Charter Communications 4.75% convertible bond in our model portfolio. The exchange into the AT&T/Cablevision PRIDES enhances the equity sensitivity of our portfolio while maintaining exposure to the cable sector. We believe Cablevision's valuation is compelling and recently reiterated our buy rating on the stock with a $67 price objective," said Merrill convertible analysts Anne Cox and Shawn Foley in a report.

The AT&T/Cablevision 6.5% preferred, at 41 with Cablevision shares at $41.92, is trading at a 3.6% valuation discount, assuming 38% volatility in the stock and a credit spread of 366 basis points over five-year Treasuries, the Merrill analysts said. Upside equity sensitivity is significant, while the 5.7% current yield lends some support on the downside. The issue has a parity delta of 0.95 and a 19% conversion premium. The Merrill analysts said one-year total return projections are +20% and -17%, given a 25% move in the common.

By contrast, the Charter Communications 4.75% convertible bond (B+/B3) has substantially less equity sensitivity. At 88.25 with the common stock at $15.38, the issue is trading at a 3% discount to theoretical value, assuming 50% volatility in the stock and a credit spread of 1137 basis points over five-year Treasuries. The issue has a 0.68 parity delta and a 51% premium. One-year total return projections are +13% and - 6%, given a 25% move in the common, the analysts said.

In the convertible report, Merrill's equity analyst was quoted reiterating a buy rating on Cablevision shares, saying Cablevision has the best cable cluster in the industry, the most technologically advanced network and a compelling valuation.

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