BZH- Consider playing the deal and then (probably) flip it
On the mids of the price talk and using a 70 and 65 vol and a 1000 over credit spread, the new BZH deals models 4.41% cheap or about 1.5% cheap a year. Theoretical delta is 6.65. As mandatories go, this is reasonable valuation. However, there are a few cautionary notes. Most importantly, the note that is called senior is actually structurally subordinate to the other debt and the CDS that references that debt because it doesn’t have the subsidiaries’ guarantee. Also, borrow is not regular although the fee has been stable in the 100-150 bps range for a while. Further, it is unlikely to substantially richen on a convertible valuation basis for a year or so. Finally, past BZH deals traded 5% cheap a year during the dark days of last fall.
However, the technicals of the deal are very positive. The size is small (75mm). Additionally, past deals have been very popular with crossover accounts. Credit Suisse often likes to allocate crossover and outright accounts over convertible hedge funds for internal political reasons and to reduce deal flipping. Further, BZH’s previous two deals were flushed earlier this year and holders made a nice return. Finally, there is an equity deal coming alongside with should help with the stock.
Weighing all of these points, consider playing the deal and then flipping it unless something odd happens and it comes on the cheaps, in which case, it may be better to hold it.