By Sara Rosenberg
New York, Oct. 16 - Merrill Lynch & Co. added Shaw Group Inc.'s 0% convertible bond due 2021 to its model portfolio as a yield alternative, saying it represents an "attractive opportunity" for outright and hedged investors who believe the equity will be range bound over the next 12 months.
"Given current trading levels and its 19.55% YTP, we believe the convert represents an excellent opportunity for investors to initiate a position in a stable credit profile, given the company's solid balance sheet and free cash flow," Merrill Lynch analysts Marc Malloy and Robert Dia wrote in a new report.
Using a credit spread of 1811 basis points and 45% volatility on the stock, they calculated the convert is trading 0.41% rich.
Along with the relatively strong balance sheet, Shaw Group's acquisition of IT Group and Stone & Webster are expected to provide more stable cash flows and reduce operating risk because of government contracts, the report explained. Furthermore, the company obtained an $800 million contract with Tennessee Valley Authority for construction and maintenance.
Shaw Group is a Baton Rouge, La. provider of piping systems and comprehensive engineering, procurement and construction services to the power generation industry.
Shaw Group Inc. 0% convertible bond due 2021
| Price: | 51.25
|
| Parity: | 10.91
|
| Percent premium: | 369.62%
|
| Current yield: | 0.00%
|
| Yield to maturity: | 3.64%
|
| Call: | May 1, 2006 at 71.49
|
| Yield to next call: | 9.61%
|
| Put information: | May 1, 2004 at 68.361
|
| Yield to put: | 19.55%
|
| Conversion ratio: | 8.2988
|
| Ratings: | BBB-/Ba2
|
| Data as of Oct. 14
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