timpb 13.75 cents fully franked, page-3

Thanks for taking the time to do the lengthy post:

I have gone through the prospectus a few times also so let me provide you my understanding:
- I agree with you that if you request exchange at any Quarter End, you get minimum ratio (not worth considering)
- But if you exchange on a reset date (Sep09) or on the occurrence of certain Trigger Events, you get Exchange Terms (being max 4:1 at 50 cents or below). The franking is not an issue as if not franked the payment must be grossed up (see top of page 3). So long as dividend is paid franked or grossed up unfranked, a Trigger event does not exist.
- regarding valuation, I assume Sep09. On an unhedged basis, you buy at 59 cents today and get 4 TIM shares plus the dividend if they pay it.
- I prefer to look at TIMPB as a relative value play. With TIM at 15 cents and TIMPB at 60 cents, either TIM is too expensive or TIMPB is too cheap. So why not buy TIMPB and short some TIM via CFD market? The only difficult question is what hedge ratio to assume.

Let’s say you buy one TIMPB at 60 cents and short 3 TIM at 15 cents;

If TIM=0 in Sep09, you get 45 cents from the short on TIM and 14 cents from the FF divi resulting in net break even (roughly)
If TIM=50 cents in Sep09, you get a loss being short of $1.40 but you get 4 TIM shares which you sell for around 50 cents (receive $2.00) and you get FF divi of 13.75 cents, resulting in net 74 cents payout
If TIM=$1.00 in sep09, you get a loss being short of $2.55 but you get $2.05 worth of TIM shares which you sell at $1.00 and you get FF divi of 13.75 cents, resulting in net loss of 36 cents

You can do all the combinations in between and your hedge ratio should cover a realistic assessment as to where TIM could go on the upside. I think at today’s levels, this is a zero risk trade provided TIM stays below 73 cents. If they don’t pay the dividend on TIMPB, the breakeven price drops to 68 cents.