Beazer Homes, Lennar hammered; airlines tumble; Yahoo! hits sour note; Computer Associates drops

By Ronda Fears

Nashville, July 8 - It was as soft as ice cream melting in the hot sun, one buyside trader said in describing the convertible market Thursday. Light summer volume was a saving grace, though, and many players were pleased to see another nice spike in volatility, he added.

"The economy is running out of gas," the buyside trader said. "There's just doesn't seem to be any more stimulus to give the markets a leg up."

Homebuilders, airlines and virtually the entire scope of technology names were the high-profile losers of the day, with rising interest rates, higher commodity prices and terrorism scares working against the markets.

"What am I doing? Just watching a 'credible large-scale Al Qaeda' terrorist attack before elections getting priced into the markets," said a veteran convertible portfolio manager, "as well as the general end of the world economy."

Beazer Homes USA Inc. and Lennar Corp. were leveled in the market's strong reaction to tepid new home orders for Beazer, and traders noted that virtually all the real estate investment trust paper was slammed as well.

AMR Corp., parent to American Airlines Inc., and Delta Air Lines Inc. were the most frequent carriers mentioned in context of the plunge in airline paper Thursday. In addition to the spike in crude oil, which inevitably means higher fuel prices, both were pressured by elevated angst about their status as going concerns.

The tech sector, meanwhile, suffered multiple wounds from several quadrants. Yahoo! Inc.'s numbers disappointed investors, weighing on internet-related names like Amazon.com Inc. Yahoo's converts dropped sharply on a dollar-point basis, traders said, pegging the bonds at 159 bid with the stock plummeting $2.52, or 7.73%, to $30.08

Computer-related issues, including the already badly beaten down software space, were hurt by more warnings and increased anxiety specific to Computer Associates International Inc.

Beazer converts lose 2 points

Paper strewn throughout the homebuilding sector was shredded Thursday in the wake of disappointing orders for Beazer, fueling nervousness that higher interest rate are hurting the new home market.

As for Beazer's new 4.625% convertibles coming under pressure, the bonds held up well for the hedge guys, many of which in fact saw a window of opportunity open up. But the outright clan was not happy with the day's events.

Beazer's converts dropped about 2 points, pegged at about 98 bid, 99 offered, while the stock fell $6.10, or 6.25%, to $91.45.

"Beazer seemed like a pretty crowded trade at the time [the convert was sold a month ago]. It looks like today is pay day for the stronger hands," said a hedged fund manager on the West Coast.

Elaborating, he said: "It looked crowded short and so did not work for a long time, or barely, until today. The short interest had been pretty large. Those numbers gives you a good idea of how many thought BZH was going down."

After Wednesday's close, Beazer reported that fiscal third quarter closings were up 12% from a year ago and at June 30 it had an all-time record backlog with a sales value of $2.3 billion. The backlog was higher by 8% from a year ago, while the sales value was up 30%.

Beazer said it will release fiscal third quarter financial results early on July 29.

News ill-boding for builders

But the market's eye honed in on Beazer reporting that its new orders for the June quarter rose just 3%.

Concerns mounted as M/I Homes Inc. reported that its new orders fell 16% during the quarter. On the other hand, the market ignored news from D.R. Horton Inc., the largest U.S. homebuilder, that its new home orders for the quarter rose 15%.

Lennar Corp. was struck hard by the news, with its converts down 2 to 3 points. The 0% issue was quoted at 63.25 bid, 63.5 offered on a $2.41 drop in the underlying stock. Lennar shares fell 5.4% to $42.18.

Some players were taking the news as an alarm for the housing sector and mortgage names like HSBC Holdings plc, or Household, and Countrywide Financial Corp.

"Even more alarming than the technicals are the fundamentals," a buyside convert trader said. "Rates have barely budged, yet [new home] sales are stagnant. What is going to happen when rates really move?"

Computer Associates hit

Computer Associates was hit on several fronts - a lawsuit by former executives, more warnings in the software sector and information emanating from the Oracle Corp./PeopleSoft Inc. antitrust suit - all refurbishing concerns about the long-running government probes into its accounting practices.

Reuters reported Thursday that as Oracle readied its bid for PeopleSoft last year, it sought advice from Sanjay Kumar, former chief executive of Computer Associates. Kumar left Computer Associates in June in order to expedite a settlement with the government over accounting problems at the company.

"These guys all played the 'land of honey pots and cookie jar' game and finally got caught," said a sellside convertible market source on the West Coast.

He explained that Kumar, the "old software head, said once: 'I can always make my numbers, as we have honey pots and cookie jars.'" Then, he added, "My favorite line was a hedge fund guy saying: 'I hope that guy ends up under a bridge in Belgium eating cat food.' He ended up in jail in Belgium instead."

In the midst of the government investigations centered on Computer Associates, more than 15 executives have left the firm, a buyside source said, noting that four former executives pleaded guilty to securities fraud and obstruction of justice charges.

"This investigation was been a lingering black cloud for over two years," he said.

The Computer Associates 5% convertible lost about 4 points, and were quoted at 113.5 bid, 114 offered with the stock at $24.25. The 1.625% convert was seen down 7 points at 136 bid with the stock there. The underlying stock closed at $24.54, having lost $1.46 on the day, or 5.62%.

After the close, Computer Associates reported preliminary first quarter results, saying it still expects earnings per share to be in the 5 to 7 cents range on a GAAP basis but warned total revenues are now likely to be $830 to $850 million, down from previous guidance of $865 to $885 million. The Islandia, N.Y. software company will report final results after the close on July 22.

AMR turnaround runs aground

A sharp spike in oil and fuel prices was largely blamed for the plunge in airline paper Thursday, but there also were woeful undercurrents about the higher costs perhaps being a fatal blow to the more troubled carriers like AMR and Delta.

The August futures contract for crude oil soared $1.25 to end Thursday at $40.33 a barrel after hitting $40.40 during the session.

"I think they [airlines] are lower due to oil going up 3.2% to a five-week high of $40.33," said a sellside convertible trader.

But he observed an interesting strategy in the AMR converts.

"Hedgies are setting up AMR paper at a 10- to 11-point spread, betting on a collapse," the dealer said, noting the convert arbs are buying the AMR 4.5s and selling the AMR 4.25s at price levels 10 to 11 points apart.

AMR shares closed Thursday down 69 cents, or 6%, to $10.66.

Although AMR narrowly averted an emergency landing in bankruptcy court last year by getting nearly $2 billion in wage concessions from its unionized employees, a buyside convert trader said: "The turnaround has run aground."

Delta trails AMR

The sellside dealer said, however, that it seemed Delta would be more likely to crash before AMR, at this time. And, he said wage concessions - past tense for AMR, and in progress at Delta - may fall short of what the carriers will need to stay afloat.

"DAL will go first," he said. "AMR is in better shape.

"The key is you want to file with about $1 billion to $1.5 billion in cash so you can survive 1.5 to 2 years in Chapter 11 [bankruptcy] without having to get financing along the way," the trader continued. "That is why DAL would choose to file sooner rather than later. [There's] no point in burning cash this winter - just file and reorganize the cap structure."

In addition to skyrocketing fuel costs, which have saddled the airline industry across the board, labor costs have been a major focal point for Delta management.

Delta and its union pilots have been in discussions on wage concessions for almost a year Delta has said it must slash its pilot contract by 45%, whereas the latest pilot offer was for a 9% pay cut. While the negotiations still seem miles apart, there has been some sentiment recently in the market that the pilots will cave in.

"The unions will help, but they may not be enough," the sellside convert trader said. "AMR got a big pay cut and they are still looking for savings. Oil [or fuel costs] and over capacity my hurt as well."

Unions at bankrupt carrier United Airlines have already agreed to $2.5 billion a year in concessions, but the airline has said it may need to ask for more in order to secure exit financing from private sources.

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