Vishay converts 1% to 2.3% rich on too tight a spread, but nice gamma: Citigroup analyst

By Ronda Fears

Nashville, Feb. 17 - Vishay Intertechnology Inc.'s convertibles are trading rich, due to too tight a credit spread, but there still could be opportunities for hedged players, said Citigroup Global Markets Inc. convertible analyst Lynn Hambright in a bulletin Tuesday.

The analyst noted, too, that the Vishay 0% due 2021 is trading slightly above the June 4 put price, although the company is prepared to meet the put in cash should it be exercised, for an outlay of roughly $229.2 million. There also is a 3.625% convertible due 2023.

"A broad product mix, an acquisition strategy during the downturn and the lack of a true comp (especially in the convert space) make for a complicated story," Hambright said.

"We find both bonds trading rich from too tight credit; barring that, we like the high gamma coupled with our view that the shares have opportunity to gap."

Vishay is generally included in the universe of semiconductor companies, even though semi-like components are only about 50% of its revenues.

As such, visualizing this company relative to similar companies is somewhat difficult.

"When we view the company's operating metrics outside of its previous peer group (Kemet Corp., AVX Corp.) with a view toward the semiconductor space, we see the company appears to fall short. In a way, this company looks a little stuck in the middle," Hambright said.

"Given the company's message is how they have grown out of a pure-play passives company (and deserve a better multiple) we suspect there is bound to be confusion on just how to view this company; this could be an opportunity for savvy convert investors."

The Vishay zeros, trading at 62.64 with the underlying stock at $23.26 shows a high gamma and moderate delta, but the Citigroup analyst said the implied credit spread is too tight at 160 basis points over Treasuries. Using a volatility input of 35%, the gamma is 0.6737, vega 0.2248 and delta 31.6%.

The implied spread is "too low for our tastes. We are more comfortable with T+250-280," Hambright said.

She suggests the bonds are trading rich by about 1.95%.

The Vishay 3.625% convertibles are not putable until 2008, and there is call protection through 2010. The bonds trade at about 142.5 with the stock at $23.26.

From the credit side, using a credit spread of 325 basis points over Treasuries, the analyst said the 3.625s are 2.31% rich. A delta neutral strategy would shave off about 1.31% of that, however, she noted.

"We would prefer to be delta neutral as we think our best opportunity comes from gaps in the stock," Hambright said.

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