By Ronda Fears
Nashville, Dec. 2 - Sony Corp.'s new jumbo euro-yen convertible was heartening for the Japanese convertible market, said Deutsche Bank Securities convertible analyst Frank Kennedy, but he said the issue was not as attractive as Sony's existing convert. He suggests investors with buying interest resist for now.
"After a relatively steady stream of small issues, the Japanese convertible bond market had to wait until the last month of the year for its first Jumbo issue," Sony's new ¥220 billion euro-yen 0% convertible due 2008, Kennedy said in a report Tuesday.
"We hope it proves to be the catalyst for a series of similar sized deals to breathe life back into the Japanese convertible bond market."
Yet, while the issue has positive aspects, the analyst said investors who want exposure to Sony probably already had a position through its 4% convertible due 2005, which remains the largest convertible issue in Japan.
Thus, he said the question was to what extent the new issue provided an investor with something different from what was already very liquid and available.
"From a directional perspective the Sony euro does not look like a compelling investment idea. The 102.5 re-offer price means the bond is being offered just over 8 points off its bond floor," Kennedy said in a report Tuesday.
"This initially looks pretty reasonable, but our tech research team is very negative on the stock with a sell rating and a ¥3,000 target price.
"Outright minded investors should hold off, bide their time and wait for the bonds to be closer to their floor before strapping them on. Likewise, accounts looking at putting the bond on a low delta and forgetting about them, on the basis this bond is unlikely to trade much below par, should hold off."
The major differences between the bonds is that the Sony 4% convertible is shorter dated, currently callable and at-the-money. The 4% issue cheapened by a point after the launch of the euro-yen issue but recovered overnight and opened 112.5 offered versus ¥3,800.
"With 1.3 years to go we are relaxed with the call risk on the 4% bond. On this basis the domestic issue looks a far more attractive investment from a volatility perspective given the significantly higher amount of gamma in the shorter-dated at-the-money bond," Kennedy said.
"Given the low gamma of the new bond, we are not overly concerned about volatility dampening and the high levels of realized volatility, and would be surprised to see either instrument trade on a sub-30% implied."
Liquidity in this name is not going to be an issue, nor should it be for those happy to hold their 4% position but worried about the risk of rolling their position in a year or so, the analyst said.
"It does not seem there are sufficient differentiating factors in the new issue to make it a compelling investment. The valuation is in line with the domestic bond but does not have as attractive a gamma profile, and there is a little too much premium for it to be interesting for directional accounts just yet," Kennedy said.
"Perhaps the greatest upside from the issue for Japanese convertible bond players might be if this deal proves to be a catalyst for a swathe of interesting and meaningful sized deals. This would revitalize waning international interest in the market and quite possibly lead to another upward leg up in basis."
Sony yen 4% due 2005
| Ask: | 112.625
|
| Parity: | 92.60%
|
| Premium: | 20.40%
|
| Call: | Jan. 4, 1998
|
| Call Price: | 101
|
| Gamma (1% stock): | 1.158
|
| Implied Volatility: | 32.3
|
|
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| Sony euro-yen 0% due 2008
|
| Ask: | 103.2
|
| Parity: | 65.83
|
| Premium: | 56.45
|
| Call: | Aug. 12, 2006
|
| Call Price: | 100
|
| Call Trigger: | 130%
|
| Gamma (1% stock): | 0.443
|
| Implied Volatility: | 31.8
|
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