Bear Stearns sees Transocean spin-off positive for convertibles

By Ronda Fears

Nashville, Tenn., July 17 - While Transocean Inc.'s spin-off of a portion of its interests in shallow and inland drilling is a positive, Bear Stearns & Co. convertible analysts do not recommend the company's two convertibles.

"The convertibles will be positively affected by the transaction if the proceeds of the IPO are indeed used to reduce debt," said Bear Stearns analysts in a report Wednesday.

"However, given the supply of high quality securities with short dated puts with much higher yields, we are unable to recommend the securities."

Transocean plans to divest its Gulf of Mexico Shallow and Inland Water business segment, selling a portion of its interest in an IPO that it hopes to complete by late 2002 or early 2003.

Standard & Poor's views the transaction as credit positive since proceeds would be used primarily to reduce debt. S&P's anticipates Transocean will reduce debt by about $500 million, bringing the company's debt/cap down from the low 30s to the high 20s.

Bear Stearns oil and gas analyst Robin Shoemaker believes the IPO is a good strategy.

Shoemaker said the shallow water drilling is a low-end, commodity business with a great deal of volatility and estimates that the unit's revenues will be down by more than 50% this year from last year's $386 million. The unit's $386 million in revenues represented about 14% of Transocean's $2.8 billion in revenues.

Shoemaker has a buy rating on the common with a $55 price target.

The impact on the convertibles is positive, as well.

"The company has not yet stated what they plan to do with the portion of their interest in the newco that they do not sell," Bear Stearns convertible analysts said.

"However, if they spin the remaining portion off to shareholders, the indentures for both convertibles state that the conversion ratio must be adjusted" by a formula whereby the current market price per share of Transocean is divided by the current market price per share of RIG minus fair market value of the distributed assets.

Transocean 0% due May 2020

Price: 60.50

Conversion Premium: 181%

Common: $26.40

Conversion Price: $71.00

Yield to Maturity: 2.84%

Market Delta: Trades outright

Spread: 80 basis points over Treasuries

100-Day Vol.: 43%

Put: May 24, 2003

Put Price: 62.857

Yield to Put: 4.61%

Credit Ratings: A-/Baa2

Transocean 1.5% due May 2021

Price: 90.0

Conversion Premium: 146%

Common: $26.4

Conversion Price: $72.136

Yield to Maturity: 2.15%

Market Delta: 35%

Yield to Put: 4.37%

Spread: 248 basis points over Treasuries

100-Day Vol.: 43%

Put: May 15, 2006

Put Price: 100%

Credit Ratings: A-/Baa2

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