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Transocean series B convertibles appear cheaper compared to sister issues: Barclays Capital
By Rebecca Melvin
New York, Feb. 10 - Transocean Inc.'s 1.5% series B convertible issue due 2037 appears to be cheaper than its two sister issues, Barclays Capital convertibles analysts said in a note published Tuesday, and they recommended buying the Bs outright, or buying the Bs and selling the A and C paper.
The analysts, Manoj Shivdasani, Venu Krishna and Peng Cheng, also recommended buying the Transocean B and C convertibles and selling the Transocean 5.25% straight bonds due 2013.
The Transocean B convertibles have a better yield to put than the A and C paper, at a 3.12% yield to the 1.85-year put, compared to the 2.37% yield for the 0.85-year put for the As and the 2.93% yield for the 2.85-year put for the Cs.
A technical price dislocation has given rise to the B paper looking cheaper compared to the other two issues due to the fact that the Bs have the highest option as spread, or discount rate, despite the fact that it has the shortest maturity.
The discount rate is a variable that equates future cash flows to the market price.
If investors buy the Bs and sell the As, they pick up 75 basis points of yield for a one-year maturity extension. They increase option-adjusted spread by 68 bps and basis cheapness by 63 bps. They also pick up 27 bps in spread over Treasuries, the note stated.
If investors buy the Bs and sell the Cs, they pick up 19 bps in yield while shortening the put by one year. They increase the option-adjusted spread by 49 bps and basis cheapness by 62 bps, picking up 68 bps in spread over Treasuries.
Transocean is a Vernier, Switzerland-based oil and gas offshore drilling services company.
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