Thursday, December 11, 2008

BUY UZG/UZV Preferred

The UZV/UZG are preferred stocks traded on the NYSE. The preferreds represent ownership interest in a trust, which owns 7.5% and 8.75% US Cellular Senior Notes, due in the 2030s.

The "par" amount of the preferred shares is $25, although the UZV currently trades at $13.25 (14.16% yield) and the UZG currently trades at $18.9 (11.7% yield). There is another US Cellular baby-bond listed under GJH, which trades at $4.80 ($10 "par" value), for a yield of 13.2%. I am ignoring the GJH issue for now.

US Cellular is 70% owned by TDS and represents the primary asset of TDS.. US Cellular currently has $1Bln in debt vs. $177MMln cash. Trailing EBITDA over the past twelve months is $1.06Bln, on revenues of $4.2Bln (25% ebitda margin). US Cellular also owns some partnership interests in Verizon's Los-Angeles cell network In 2007, US Cellular generated operating cashflow of $863Mln, less capital expenditures of $565Mln, for free-cashflow of $298Mln. The company has adequate liquidity between its cash holdings and $700Mln revolver (expires 12/2009) and is currently profitable. USM is the last independent carrier, following the acquisition of Alltel by Verizon. Currently, Verizon bonds trade at +500/30yr (8.1% yield). Verizon Wireless bonds trade 50bp tighter than the holdco bonds.

As such, buying the US Cellular bonds appears to be attractively valued, in the form of this structured note. At current yields, I would recommend buying UZV, as the 14% yield and $13.25 price is very attractive (53% of par, a high discount for a non-distressed credit.. In fact, the dislocation in bond pricing actually presents an arbitrage opportunity, in which you can sell the high-priced UZG (76% of par, $18.90 price, 11.6% yield) and buy the lower-priced UZV notes for a positive arbitrage of 240 basis points and a significantly lower-dollar price relative to par. Its a win-win, or you could keep it simple and just buy UZV. I've tried a little of both, K-dawg

No comments: