Transocean 1.5% series C convertibles recommended at buy: Lehman analysts

By Rebecca Melvin

New York, March 26 - Transocean Inc.'s convertible bonds - particularly its 1.5% series C convertibles - are attractive for both outright and hedge-based investing due to their strong credit and volatility, according to a Lehman Brothers Holdings Inc. research note Wednesday.

Equity investors seeking more defensive exposure to Transocean should also consider allocating a portion of their assets to the "C" convertibles, which are very liquid, Lehman convertibles analysts said.

Together Transocean has three convertibles, with a combined total face outstanding of $6.6 billion. The series Cs due 2037 offer the greatest relative value given their low 1.55 decay, low 0.61 carry, and 0.63 vega, the analysts said. There is also a Transocean 1.63% series A convertible due 2037 and a Transocean 1.5% series B convertible due 2037.

The convertibles are rated BBB+ by Standard & Poor's and Baa2 by Moody's Investors Service.

Although the series C convertibles have a put that is two years after the series As, the series Cs are still preferred given that they trade at the same price but have a higher delta of 61.3% versus 51.3%. Their theta decay over one year is the lowest at 1.555 points versus 2.56 points, suggesting that if everything is held constant over one year, the series Cs would outperform the series As by one point, the analysts said.

The credit on the series Cs would have to widen by about 50 basis points more than the series As for a full give-up of this advantage.

The implied vol on the series Cs at 34.1 is nearly one point lower than that on the series As, which is 35. New investors should consider owning the series Cs, and the holders of the As should consider swapping into the Cs given the relative attractiveness at current levels.

Against the backdrop of a strong credit profile, Lehman Brothers said it believes the three convertibles are attractive candidates for volatility-based trades; and from an equity perspective, the balanced convertible bonds offer a good way to minimize risk while still affording a fair degree of upside equity participation.

"By investing in convertibles, the equity investor can move up the capital structure by owning bonds that are trading relatively close to their bond floor, a 24.1% risk premium, pick up higher income via the convertible coupon, own a security with a better risk-reward profile, 45% to 32%, and participate in good part of the equity upside due to the relatively decent delta of 61.3% and long call protection of 4.7 years," the convertibles analysts said.

Lehman equity analysts continue to have a positive stance on Transocean with a 1-overweight stock rating and a price target of $170 per share.

The Transocean 1.5% C series is priced at about 107.5 versus a stock price of $131.06. Its current yield is 1.4%, with yield to maturity and yield to put at 1.2% and a premium of 38.3%.

Transocean is a Houston-based offshore oil and gas driller.

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