Wachovia analyst says Cendant spreads could tighten in the next few months

By Ronda Fears

Nashville, Feb. 7 - Cendant Corp.'s debt ratios could improve significantly this year, and Sri Nadesan, convertible analyst at Wachovia Securities, Inc. expects the spreads for the three convertible could tighten, along with a possible credit upgrade.

"Currently, Cendant's credit rating is Baa1/BBB with a negative outlook at both agencies. If the company continues to pay down debt in 2003 and avoids acquisitions, Cendant has the opportunity to be upgraded after about a year," Nadesan said in a report Friday.

Cendant's credit default swaps were quoted on Feb. 4 at 255/270 basis points over Libor for the five-year tenor, he noted.

The stock is trading at a low multiple of 8.4 times 2002 earnings and 7.2x estimated 2003 earnings, he added. By comparison, Choice Hotels trades at 12.1x 2002 earnings per share and 11.0x estimated 2003 EPS, and Hilton Hotels trades at 23.9x 2002 EPS and 26.6x estimated 2003 EPS.

Cendant has three senior convertible bonds outstanding - 0% putable in May 2003, 0% putable in February 2004 and 3.875% putable in November 2004. All three are essentially yield plays with relatively high yields.

The 0% putable in May 2003 and due May 2021 trades at a yield to put of 3.7% and a premium of 142%. This bond is almost certain to be redeemed on the put date, Nadesan said. It trades at an implied credit spread of 263 bps over Treasuries.

Cendant's 0% putable in February 2004 and due February 2021 trades at a yield to put of 3.5% and a premium of 79.5% and has an implied credit spread of 306 bps over Treasuries. Nadesan said the spread could tighten to about 200 bps on this bond over the next few months.

The 3.875% putable in November 2004 and due November 2011 trades at a yield to put of 4.4% and a premium of 126%. This bond trades at an implied credit spread of 425 bps over Treasuries, the widest among the three bonds. Nadesan said this credit spread could tighten to the 250 bps level over the next few months.

After the market close Thursday, Cendant reported fourth quarter adjusted earnings of 29c per share, in line with the consensus estimate and the company's prior guidance. Cendant affirmed its prior guidance for 2003 EPS at $1.46.

"In 2002, the company's leverage ratio improved impressively to 2.1x from 2.9x at the end of 2001," the analyst noted.

"The company's stated goal is to reduce debt by about $1 billion in 2003. If this happens, we believe the leverage ratio could improve further to under the 1.5x level by the end of 2003."

Cendant ended the year with total debt of $5.6 billion.

In fourth quarter, Cendant bought back $143 million face of the 0% convertible due May and so far this year has bought back an additional $334 million face. Nadesan estimates about $523 million of the original $1 billion issue is still outstanding.

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