Deutsche recommends switching out of Lennar's old convert into new one

By Ronda Fears

Nashville, Tenn., Jan. 31 - Deutsche convertible analysts recommend switching out of Lennar Corp.'s 0% convertible due 2018 into the new 0% convertible due 2021 in a report Thursday, noting a more balanced profile, less expensive valuation and more call protection .

Lennar stock has had a wonderful run, rising from $35.60 in late November to $56.26 at the close Wednesday, the analysts noted, representing a rise of 58% compared with a 1.3% decline in the S&P 500 over the same period. Deutsche retains a strong buy rating on the stock.

"We certainly would want to retain exposure to the story, but we would recommend a switch from the 0% 2018 to the 0% 2021," the convertible analsyts said.

There is a more balanced profile and better risk/return in the 2021 issue, the analysts said, noting the 2018 bond trades at just a 7.6% premium, versus 23.2% on the 2021. This means that over a one year period, assuming unchanged valuations, the 2018 has an upside/downside participation with a 25% move up/down in the stock of 66.7%/74.3%. But, the 2021 has a return of 65.1%/36.2%, which is very attractive.

The 2021 issue is also less expensive, the analysts said.

"The relative attractions of the two bonds is reflected in the theoretical value differential. The 2021 bond is five implied volatility points cheaper (41.2% versus 46.1%)," the analysts said in the report. "The reason for the extended valuation of the 2018 bond is the fact that arbitrage funds can run the position on a heavy delta with the security of a put next year."

There is much more call protection on the 2021 issue. The 2018 has hard call protection only to July 2003 when it is also putable at 56.231. By switching into the 2021 bond, investors would extend their call protection by almost three years to April 2006 when that issue is putable at 46.810.

"Both bonds are $230 million in size and liquidity is comparable," the analysts said. "The only slight negative is the relative subordination of the 2021 bond to the 2018 one. The 2018 bond is senior and rated BB+. The 2021 bond is subordinated and rated BB-. But we believe that a 50 bps credit spread premium (which we factor into all of the above numbers) is sufficient."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.