Lennar flat to slightly higher on hedge on earnings; Radian steady; Dendreon catches a bid

By Rebecca Melvin

New York, March 27 - Lennar Corp.'s convertibles were higher outright, but little changed to just slightly higher on a hedged basis, on Tuesday after the Miami-based homebuilder reported better-than-expected earnings that sent the underlying shares up nearly 5%.

Other names mentioned in trade were equally lackluster. DryShips Inc. slipped on Tuesday, reversing late gains notched Monday, and Radian Group Inc., which was active, traded more or less in line with recent trades. But those trades are up significantly from the beginning of the year, however.

Dendreon Corp. was cited as a notable name to the upside, having caught a decent bid in recent days and recouping about 2 points since it bottomed last week.

Volume was perhaps average to light, but there were not many names or price moves of particular interest, convertible market players said.

A lot of volume was concentrated in a few of the bigger names like medical device maker Medtronic Inc. and biotechnology giant Amgen Inc.

Equities, which were little changed for much of the session, slumped at the end of the day. The Dow Jones industrial average ended down 43.9 points, or 0.3%, at 13,197.73; the S&P 500 stock index wilted 3.99 points, or 0.3%, to 1,412.52 and the Nasdaq stock index slipped just 2.22 points, or 0.07%, to 3.120.35.

The muted action in equities followed a rally on Monday.

Economic data on Tuesday was mixed. The Consumer Boards confidence index, boosted by an improving job market, came in near its highest level in a year in March, and in line with expectations at 70.2, down from a revised 71.6 reading in February, according to the New York-based research group. Another report showed home prices dropped at a slower pace in January, but they are still at nine-year lows.

A few things 'in the pipeline'

There was no new issuance in the primary market for the second day this week, but one syndicate source said he believed there were things in the pipeline and that the recent new issues that have hit the market in the past month have caused potential issuers to consider the convertibles market more carefully.

"People have woken up a bit," the syndicate source said.

Market players would like to see more paper in the market, which is a stimulus for trade and pricing and encourages more focus on the convert universe.

Cenveo Inc., the small, $75 million issue that priced last week, was being held up as a possible model for issuers to follow.

"Cenveo had to tap another market. They should have accessed two markets from the outset, from a point of strength, and it would have done much better, "a market source said, referring to the fact that initially Cenveo was only going to do a straight deal, but the straight bond offering struggled, and had to be reduced in size with a convertible piece added in.

Meanwhile, nothing new was heard on the planned United Technologies Corp. mandatory offering, which was being planned to help finance an acquisition. The deal size was seen at $1.5 billion, according to a market source, but there was no word on the bookrunners, talk or timing yet.

Lennar flat to higher

Lennar's newer 3.25% convertible due 2021, which priced in November, was around 137 versus an underlying share price of $27.20 during the session.

A second source put the paper at 138.375 versus an underlying share price of $27.57, based on the theoretical model at a 76% delta. That compared to a price of 134.5 versus an underlying price of $26.40 on Monday.

That was 0.1 point higher on a hedged basis, the market source said.

In addition to Lennar's strong earnings report, "the housing recovery is underway, not in a big way, but in a steady, positive way, and the stock has almost doubled since September," the market source said.

Lennar shares hit a 52-week high on Tuesday at $28.28 and ended off that level, but still up $1.23, or 4.7%, at $27.63.

Lennar's 2.75% convertible due 2020, which priced in 2010 and is callable in December 2015, traded around 140 versus an underlying share price of $27.20. A second source had it at 140.875 versus the higher share price of $27.57. That paper was seen up 0.2 point on a hedged basis on a 76.5% delta.

Lennar's 2% convertible due 2020 was trading at 117 versus the $27.20 underlying share price. That issue was seen unchanged on a delta hedge of 60.6%.

Lennar reported net income for the three months ended Feb. 29 that fell to $15 million, or 8 cents a share, from $27.4 million, or 14 cents, a year earlier. But the company's year-earlier earnings were boosted by a one-time $37.5 million legal settlement. The result was 3 cents better than a 5-cents-per-share result that analysts expected.

Revenue was in line, with the company posting $724.9 million of revenue for the quarter, up from $558 million in the year-earlier period. Analysts had expected about $700 million. Revenue from home sales increased 33% in the fiscal first quarter to $610.7 million from $457.9 million in the same period of 2011.

"We have seen the market stabilize, driven by a combination of low home prices and low interest rates, making the decision to purchase a new home more attractive compared to the heated rental market, said Lennar chief executive Stuart Miller in a statement.

Orders increased to 3,022 homes, up from 2,267 homes a year earlier, Lennar said. The backlog of homes under construction, another indicator of future revenue, rose to 2,711, a 39% increase from a year earlier. The average price of a home delivered rose to $246,000 for the quarter, up 3% from a year earlier.

Radian steady

Radian's 3% convertibles due 2017 traded at about 69 bid, 70 offered on Tuesday, which was steady on where the paper has been in recent sessions.

Shares of the Philadelphia-based mortgage insurer slipped 12 cents, or 2.6%, to $4.46.

"Over $12 million of bonds traded, which is not bad in this market," a convertibles trader said.

The bonds, which printed at 69 as well as at 70, were trading in the 40s in December.

The mortgage insurance category has gotten a lift from regulatory and market related boosts.

One competitor, PMI Group Inc., has failed, and the consolidation has been viewed as an improvement for those remaining in the space.

Dendreon catches bid

Dendreon's 2.875% convertibles due 2016 traded at 79.375 bid, 79.625 offered on Tuesday, which was up about 2 points from a bottom marked on March 21 at 77.5 to 77.75, according to market sources.

A rumor that Dendreon, a Seattle-based biotech company, was going to be acquired on March 21 caused the convertible to reverse course, a convertibles trader said.

"It stopped out after that," the trader said.

But Dendreon shares on Tuesday were down 28 cents, or 2.7%, at $10.11.

"It definitely firmed up, starting a couple days ago," the trader said.

The Dendreon convertible traded at 79 on Monday and had traded below 78 last Wednesday.

"That's 2 points in less than a week," the trader said.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Dendreon Corp. Nasdaq: DNDN

DrysShips Inc. Nasdaq: DRYS

Lennar Corp. NYSE: LEN

Medtronic Inc. NYSE: MDT

Radian Group Inc. NYSE: RDN

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