By Ronda Fears
Nashville, Tenn., Sept 23 - Xerox Corp. is a fallen angel that could climb out of "capital markets purgatory" to claw its way back to grace, Deutsche Bank Securities Inc. convertible analysts believe.
"Xerox Corp. is a previously iconic U.S. company humbled by the end of the bull market and the dysfunctional credit markets that have prevailed over the past year," said analysts Jeremy Howard, Jonathan Cohen and Robert Barron in a 20-page report Monday.
"But we believe that the current restructuring and management changes at Xerox do offer hope that the company can emerge from its current problems without a default. Given our analysis of the credit of the company, there is an opportunity for investors to take advantage of the still highly distressed valuation of the two convertibles via several different strategies."
The Xerox 0.57% discount convertible bond 2018 is putable at 64.891 on April 21. The bond is offered at 59.50 for a yield to put of 16.70%.
"Given the debt maturity schedule as we understand it and cash position at Xerox, we are now reasonably confident that this bond will be redeemed successfully," the analysts said.
The Xerox 7.5% trust preferred 2021 ranks lower on the balance sheet and is not putable until December 2004.
"This greater uncertainty is reflected in its even more distressed valuation," the analysts said.
"But for outright investors we believe that a breakeven in June 2005 and the improving fundamentals make the trust preferreds a very interesting outright idea. The bond has a wonderful theoretical participation profile and will outperform the equity on a total return basis even with the stock up 50% in December 2004."
For arbitrage investors, the Xerox 7.5% 2021 can also form the basis of some interesting strategies, the analysts said.
"Investors on a 100% delta pay only 2 points over the intrinsic equity and the present value of the secured dividends to the December 2004 put. They need the bond to make only 2/3 more quarterly dividend payments after the put date in order to make money on the trade," the analysts said.
"Although the preferred is callable and putable in December 2004, there are a number of paths where the bond is neither put nor called immediately, and these are the profitable ones for the 100% arbitrageur. Of course, funds siding with our analysis could risk a lighter than 100% delta and profit from an increase in the share price."
Xerox 0.57% convertible bond due 2018
| Ask: | 59.50
|
| Equity price: | $6.99
|
| Parity: | 5.458
|
| Premium: | 990.19%
|
| Conversion ratio: | 7.808
|
| Conversion price: | $128.07
|
| Bond floor: | 59.30
|
| Delta: | 0.00%
|
| Yield to maturity: | 4.12%
|
| Current yield: | 0.98%
|
| Put: | April 21, 2003 at 64.891
|
| Yield to put: | 16.78%
|
| Call: | April 21, 2003 at 64.89
|
|
|
| Xerox 7.5% convertible preferred due 2021
|
| Ask: | 48.57
|
| Equity price: | $6.99
|
| Parity: | 38.30
|
| Premium: | 26.81%
|
| Conversion ratio: | 5.4795
|
| Conversion price: | $9.125
|
| Bond floor: | 45.40
|
| Delta: | 63.68%
|
| Yield to maturity: | 7.82%
|
| Current yield: | 7.72%
|
| Put: | Dec. 4, 2004 at 100
|
| Yield to put: | 26.81%
|
| Call: | Dec. 4, 2004 at 103.75
|
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