Beazer Homes trades up with shares on debut; Alcoa weaker; Boston Properties active, steady

By Rebecca Melvin

New York, Jan. 7 - Beazer Homes USA Inc.'s newly priced 7.5% convertible mandatories moved up to 27.5 in the aftermarket Thursday, from par of 25, as their underlying stock rebounded smartly from a 12% drop Wednesday.

Alcoa Inc. convertibles, which were trading at well over double par, shed about 9 points after a Citigroup analyst downgraded the Pittsburgh-based aluminum company, citing a weak dollar as potentially diluting the positives of a recovery in aluminum prices.

Boston Properties Inc. was also very active in trade, particularly its 2.875% convertibles, although there wasn't a big price movement in the name, which has several convert issues outstanding.

"It's an investment-grade name, and investment grade is in high demand right now," a New York-based sellside trader said.

Overall, the market remained pretty busy, as has been the case most of this week, the first of the new year. Generally activity has been in the typical names that usually dominate trade, such as Amgen Inc., Transocean Ltd. and EMC Corp. But there was a broadening out into other names as well, sources said.

On Thursday, 145 issues traded in almost $1 billion of volume, one New York-based sellsider pointed out.

The activity this week may be related to crossover and outright traders, another New York-based sellsider suggested.

"These investors are looking wherever they can find yield," the sellsider said.

Going into year-end, valuations cheapened just a little, possibly due to the fact that trading volumes were very thin. The cheapening wasn't enough to entice a big rush in by hedge players, however, sources said.

"It's very early to say yet [where the market is heading for 2010]," a New York-based sellside analyst said. "I think the equity market only traded off only a little bit today, but for the week the equity market is on fire, especially commodities, which on an outright basis are very strong. We'll see if there is a correction on the way, which will be an opportunity to buy on the weakness for hedged investors."

Beazer mandatories settle higher

Beazer's newly priced 7.5% mandatory convertibles due 2013 settled at 27.375 on their debut Thursday, after trading earlier at 27.5, according to a syndicate source.

Shares of the Atlanta-based homebuilder bounced back 36 cents, or nearly 8%, to $5.13, after slumping 12% on Wednesday.

Beazer's new deal was for $50 million of three-year convertible mandatories, at par of $25, which priced after the market close Wednesday to yield 7.5% with an initial conversion premium of 22%.

Pricing came at the rich end of talk, and a day earlier than expected due to strong demand for the issue, but it wasn't upsized.

Beazer also priced a secondary offering of stock at $4.60 per share that was upsized to 19.5 million shares from 18 million, for proceeds of $87.7 million.

Beazer's existing 4.625% convertibles due 2024 were seen at about 96.25 Thursday.

Beazer certainly isn't the darling of the homebuilding sector. People are more interested in Lennar and KB Home, said a New York-based sellside analyst, who didn't value the Beazer deal because of its small size.

The credit is one of the weakest among homebuilders, and for a while the existing convert was trading at very distressed levels.

"That being said, if it's still floating, it will be floating for awhile," the analyst said.

When Beazer announced its offerings Tuesday, it also provided an upbeat outlook, saying new orders were up 37% in the fourth quarter, while closings were up 8%. The biggest gains were for new orders in the western United States and for closings in the eastern United States.

Alcoa weaker

Alcoa's 5.25% convertibles due March 2014 traded down 9.25 points to 264.75 Thursday, while its shares dipped 52 cents, or 3%, to $16.46.

Given that the bonds are so far in the money, the only likely investors would be hedged players, and in that arena interest isn't quite high enough to generate sufficient demand, so they were seen cheaper for purely technical reasons, according to a New York-based sellside analyst.

"We've seen it with other double-par names that moved from 120 or 130 up to 200. The outright guys get out, and then there's not enough interest among hedge players to take it over, and during that process the paper kind of slips," he said.

Citi downgraded the company to hold/high-risk and maintained its $17 per shares target price, with analyst Brian Yu saying that the stock "appears fairly valued relative to Citi's dilution-adjusted normal earnings per share assessment of $1.13 per shares and the spot aluminum price of $1.06 per pound."

"In addition, the bank is maintaining its below-consensus fourth quarter estimate of $0.03 versus consensus of $0.06," Yu said.

While aluminum prices averaged 9.5% higher in the fourth quarter versus the third quarter, or $0.90 per pound compared to $0.82 per pound, foreign exchange headwinds may prevent Alcoa from achieving analyst expectations.

Although the company has divested a number of non-core businesses, restructured several businesses, curtailed production capacity, and reduced its dividend and capital expenditures, it remains under pressure due to tepid demand for industrial metals, according to the Citi note.

Boston Properties active, steady

Boston Properties' 2.875% convertibles due 2037 were seen little changed Thursday at about 98.75, which is where they have been trading in recent weeks, according to a New York-based sellsider.

The Boston Properties 3.625% convertibles due 2014 were seen at 99.5 and the Boston Properties 3.75% paper due 2035 was seen at 102.75, according to a pricing source.

Shares of the Boston real estate investment trust settled down just 30 cents, or less than half a percentage point, at $68.74.

The convertible issue does not have much delta, and therefore is not considered a real candidate for hedge players.

"These [issues] are not very interesting to either hedged or outright players, because you don't get a lot of delta. If you're hedged, and these are trading at a 50% to 60% premium over parity, it's not the usual play for hedge guys," a sellsider said. The converts are trading at a wider spread to the straight bonds, the sellsider added.

Nevertheless Boston Properties is an investment-grade name that is in high demand right now amid a dearth of investment-grade paper after a lot was redeemed by issuers last year and there was a lack of replacement paper.

When asked why Boston Properties was in trade, a sellsider said: "I don't know. Yesterday it was BRE [Properties], today it's Boston Properties."

Mentioned in this article:

Alcoa Inc. NYSE: AA

Beazer Homes USA Inc. NYSE: BZH

Boston Properties Inc. NYSE: BXP

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