http://blogs.wsj.com/marketbeat/2008/04/11/goldman-sell-wamu-stock-buy-the-bonds/
Speculation: Goldman Sach buys WMI Bonds and short stock for JPM takeover
Given the general reticence of analysts to issue “sell” ratings on shares, suggesting that investors actively short a stock takes a negative outlook to another level. Goldman Sachs analysts today told investors they should short shares of Washington Mutual Inc.
Shares of Washington Mutual have declined of late (WM, last 3 mos.)
However, they offset that position by recommending buying the company’s bonds. Whereas the recent capital-raising activity dilutes the shareholders, it helps bondholders worried about the balance sheet. Some of the $7 billion raised came from convertible bonds, which convert at a price lower than the current share price.
Goldman analyst James Fotheringham estimates that the struggling lender should trade at a value equal to its tangible common equity which they estimate at $9.84 a share; the stock is currently at $11.38 a share, down a few pennies on the day.
He estimates the company has $17 billion to $23 billion of embedded losses in its mortgage portfolio — of which just $3 billion has been absorbed.
However, in the same note, Goldman credit analyst Louise Pitt suggests buying the company’s bonds and credit-default swaps, saying both indicators trade at levels wider than their peers, particularly following the raise of $7 billion in capital — including $5.5 billion in convertible preferred shares — to shore up the balance sheet. The convertible shares can convert at $8.75 a share.
“The $7bn of new equity capital is a clear positive for bondholders,” she writes. “We expect the convertible to become common equity later this quarter, though we believe there is still a small risk that shareholders do not approve the dilution.”
WaMu’s CDS currently trade at a cost of $415,000 for insurance against default for five years, according to Phoenix Partners Group
