Bear Stearns: Six Flags convert pays investors well to wait

By Ronda Fears

Nashville, Tenn., Feb. 4 - The Six Flags Inc. 7.25% convertible preferred pays investors well to wait, with an 8% current yield, and has a very attractive risk/reward profile, said Bear Stearns & Co. head of convertible research Yaw Debrah in a report Monday.

The convertible analyst noted that Marc Falcone, Bear Stearns' leisure analyst, believes it is time to own Six Flags. While there is no guarantee of good weather and an economic rebound is far from certain, the equity analyst believes Six Flags offers the greatest potential for upside with rather low expectations. His 12-month price target for the underlying stock is $19-$20.

The Six Flags 7.25% convertible preferred (B-/Caa2) has a stable rating outlook from both credit agencies and Moody's anticipates the company will generate free cash flow from existing operations in 2002. Falcone is projecting Six Flags to generate $100 million to $120 million in free cash flow this year, which he believes the company will likely use to delever, while also having an eye towards acquisitions.

"Given the muted equity returns projected for the equity markets in general in 2002, we continue to propose a combination of yield together with equity appreciation as the best total return package for investors," the report said.

The convertible has a simple, conventional convertible preferred structure with the added advantage of a maturity date of Aug. 15, 2009, as opposed to most conventional convertible preferreds, which are perpetual securities. The convert was trading Friday at $22.81 versus a stock price of $15 and a conversion premium of 26.5%. At this level, it offers a current yield of 8.0%, which is 800 basis points more than the underlying common, which does not pay a dividend.

"On a price appreciation and depreciation basis, the convertible is currently showing about 70% movement with the underlying equity," the analyst noted.

"When you couple this together with the high current yield of 8%, you get a very attractive risk/reward profile. We estimate that for a 25% rise in the equity over the next year, the convertible will give you 85% participation, on a total return basis. On the other hand, if the equity was to drop 25% over the next year, we estimate that the convertible will only participate in about 45% of the equity loss."

The analyst noted also that the dividend on the preferred is payable in cash or common stock. To date, the company has paid the dividend in cash. The dividend is also cumulative, so that if the company for whatever reason decides to defer its payment, the preferred will continue to accrue the dividend. It was also noted that the preferred ranks higher than the equity in the event of company default.

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