Beazer Homes yo-yos; RAIT stabilizes; KKR Financial moves up; Horizon Lines to test the market

By Evan Weinberger

New York, Aug. 1 - Rumors of bankruptcy sent Beazer Homes USA Inc. convertibles tumbling early, but an official denial led to a rally in the bonds that left them about where they started Wednesday.

Many mortgage-related issues, like those linked to RAIT Financial Trust, KKR Financial Corp. and Countrywide Financial Corp., hung around Tuesday's lows but investors sat tight.

Even in a seemingly more stable industry, Peabody Energy Corp. was lower.

And generally traders and analysts all said that investors looked to either sit tight or get out of vulnerable positions.

"Things are very sloppy in the converts markets today," one sellside analyst said. "People are just selling stuff down. It kind of feels across the boards."

The now-familiar woes in the subprime mortgage sector and continued concerns over swiftly widening credit spreads are producing wildly volatile equity markets - the Dow Jones Industrial Average seesawed up and down before finishing the day sharply up - which in turn is leading to uncertainty in convertibles.

"There's great concern out there for how deep this can get and how it'll affect converts," a sellside analyst said.

But another analyst cautioned that investors were being too quick to judge mortgage-related companies, their stocks and convertibles included.

"The idea that they're just sort of disappearing into oblivion because of one bad credit, it's being overdone," the analyst said. "There are a lot of people who would like to sell 'em first and buy them back cheaper."

Into this mixed up convertibles universe, one new issue rides. Horizon Lines Inc. planned to test the market's openness to new deals during a credit crunch with an announced $300 million in convertible senior notes set to price after market close. There is a $30 million greenshoe attached to the issue.

"This will be a good barometer for the market's appetite for new issues," another analyst said.

The bonds are talked at a 3.5% to 4% coupon and a 30% to 35% initial conversion premium. From the way analysts and traders have spoken, in the current market, they're looking for the bonds to come in at the cheap end.

Horizon Lines plans to use the proceeds to buy back approximately 1 million shares of its common stock and to enter into convertible hedge transaction and to buy back outstanding bonds issued by its subsidiaries. It is also obtaining a new credit facility as part of the refinancing.

Horizon Lines is a Charlotte, N.C.-based container shipping and integrated logistics operations company.

Speaking of mixed-up markets, the Dow rose 150.38 points, or 1.14%, to close at 13,362.37. The index had been vacillating between 50 points up and 50 points down, give or take a few. The Nasdaq spent most of the day lower before it, too rallied, closing up 7.6 points, or 0.3%, and finishing the day at 2,553.87.

Ready for what's on the Horizon?

If ever there was a good test of the market's willingness to accept new issues while in a state of uncertainty, Horizon's offering of convertible senior notes is it.

The convertibles, talked at a 3.5% to 4% coupon and a 30% to 35% conversion premium, were set to price Wednesday after the market close.

With credit spreads widening and a general feeling uneasiness setting in among a lot of investors, traders and analysts are looking for a deal that greatly favors buyers.

"I hope its cheap, otherwise they are going to get slammed by the market," said one sellside analyst, who admitted that he had not studied Horizon's credit very closely.

Another analyst, who modeled the Horizon convertibles at 350 basis points over Libor with a 30% volatility, said he liked the Horizon notes on the cheap end as well. "The credit markets are bouncing all over the place," he said. "To get it done cleanly, it would be smart to price it at the cheaps."

Widening credit spreads factored into the model the analyst used, he added. "Three weeks ago, this would probably be a 250 over Libor," he said. "With that in mind, this being a solid single B credit, I think 350 is an appropriate assumption."

But one analyst was less enthusiastic about the prospects of a new deal hitting the streets only to be greeted by widening credit spreads and extreme volatility from day to day.

"I heard someone comment this morning that they didn't know why anyone would buy it," he said.

Beazer Homes goes on a wild ride

Executives at Beazer Homes got to work Wednesday morning and had to deal with a torrent of rumors that the Atlanta-based homebuilder was about to declare bankruptcy.

The company's stock (NYSE: BZH) fell around 40% in morning trading and its 4.625% convertible senior notes due 2024 fell to 62.20 after finishing Tuesday at 75 versus $13.99 on the stock.

The company at least put a temporary halt to the rumors with a press release. "We have become aware of rumors circulating in the market about Beazer Homes' liquidity and a prospective bankruptcy filing," the statement said. "We do not know where these scurrilous and unfounded rumors started."

JPMorgan also issued a report calling the Beazer Homes bankruptcy speculation "false, in our view."

Those statements, in turn, sent Beazer Homes' stock and convertibles shooting up. The convertibles finished the day at 75 versus a stock price of $11.48. The stock, at the end of the day, was lower by $2.51, or 17.94%.

"The thought is, one of these homebuilders is going to go bankrupt at some point," one analyst said of Beazer Home's convertibles. "They bounced back, but that's the state of this market. Clearer heads are buying on these dips."

Mortgage-related convertibles stabilize

After significant drops Tuesday, convertibles linked to the volatile home mortgage sector settled in at their lower levels Wednesday.

RAIT Financial Trust's 6.875% convertible senior notes due 2027 maintained their position in the 50s, where they closed Tuesday. The Philadelphia-based mortgage finance provider's convertible finished trading Wednesday at 51.40 versus $9.82. The stock (NYSE: RAS) closed 54 cents, or 5.21%, lower.

Moving up was San Francisco-based real estate investment trust KKR Financial. The bonds, which closed Tuesday at 90.93 versus $20.94, finished Wednesday at 91.875 versus $19.39. The company's stock (NYSE: KFN) lost $1.35, or 6.51%, Wednesday.

Countrywide Financial, a Calabasas, Calif.-based mortgage lender, saw both tranches of its convertibles hang tough to their levels from Tuesday.

The Libor plus 350 bps series A bonds April 2037 finished trading at 93.75 versus $27.22 Wednesday. The Libor plus 250 bps series B bonds due May 2037 closed at 93.5 versus $27.22.

The company's shares dropped 95 cents, or 3.37%, as the bloodletting in the home mortgage sector continued in the equity markets.

"Only time will tell if it's an over-reaction or if people were smart in getting out," one analyst said of Tuesday's flight from mortgage-related convertibles.

Peabody moves lower

One issue in the normally defensive mining and energy sector moved noticeably lower Wednesday. Peabody Energy's 4.75% convertible junior subordinated debentures due 2066 closed Wednesday at 96 versus $41.90 for the stock. They closed Wednesday at 98 versus $42.26.

Stock in the St. Louis-based coal miner dropped 36 cents, or 0.85%.

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