Lennar higher on positive earnings report; L-1 Identity to par on merger news; CBIZ to price

By Rebecca Melvin

New York, Sept. 20 - Lennar Corp. convertibles traded higher as its underlying shares jumped on Monday after the Miami -based homebuilder swung to a third-quarter profit on better sales and lower construction costs.

L-1 Identity Solutions Inc.'s takeover-protected convertibles moved up to nearly par after the Stamford, Conn.-based identity security company said that it had agreed to be acquired by Safran SA of France for $12 per share in cash, or about $1.06 billion.

Digital Realty Trust Inc.'s 5.5% convertible bond issue - not the preferred paper - was also in trade, a sellside analyst said.

In the primary arena, CBIZ Inc. launched a $100 million offering of five-year convertible senior subordinated notes that was seen pricing on Tuesday after the market close.

Back in the secondary market, convertibles were mostly bid higher outright Monday, but not much was trading, sources said, as equities advanced amid a raft of headlines and improved investor sentiment.

"There were a lot of news headlines; but not many interesting names," a New York-based sellsider said of the convertibles' trading session. Another source said there was "a lot of noise; no trades."

Among the day's top stories was the National Bureau of Economic Research saying that the recession officially ended in June 2009, though that didn't mean the economy had "returned to operating at normal capacity."

President Obama's widely anticipated Town Hall meeting at midday revealed a less combative demeanor toward Wall Street and the financial markets, but there was no substantive shift in existing policy.

He said he supported private sector recovery, but didn't appear to believe that that would require an altered policy stance.

Election as market catalyst

Several market sources said they believed the election is the single biggest market catalyst on the horizon and that the current upward swing in the markets is due to the perception that Democrats will lose control of both houses in the election.

"The issue is you never know when something like that is actually in the market [...] It should be priced in prior. It may be priced in by early October. Of course, if people changed their minds and felt for some reason the Dems would continue to control both houses, I think we go down very hard," a New York-based trader said.

Not everyone agreed.

A second New York-based trader said: "[...] selling the market on account of Democrats in office is simply not supportable by the facts."

A third source held the view that while the markets were being helped upward right now by the current view on the elections, he didn't believe it would be fully priced in until the election results.

"The market is looking for gridlock, reduced spending, anything that puts a check in the Democratic agenda," the sellsider said, adding that he thought President Obama also struck a much softer tone towards business in Monday's Town Hall meeting, and this was positive.

Technically, the equity markets were making a break out; nothing that happened today makes the risk on trade step back.

Lennar moves up

Lennar's 2% convertibles due 2020 traded at 94 versus a share price of $15 on Monday, according to a sellside desk analyst.

Another pricing source put the Lennar convertibles at nearly 93.78 bid, compared to 91.67 bid on Friday.

Shares of the company added $1.15, or 8.2%, to $15.14 in heavy volume.

Lennar reported a higher-than-expected quarterly profit and a decline in orders that was also better than expected.

Net earnings of $30 million compared to a net loss of $171.6 million. Earnings per share of 16 cents per shares faced a loss of 97 cents per share.

Lennar Homebuilding operating earnings of $38.1 million compared to a loss of $154.7 million. Gross margin on home sales of 21.1% improved.

Lennar's orders fell sharply by 15% following the expiration of a U.S. tax credit that boosted home sales last spring. But the Lennar order decline was not as bad as anticipated.

Revenue rose 14% to $825 million, which was better than $777.5 million expected by analysts.

"During our third quarter, as expected, our sales pace declined as a result of the expiration of the Federal homebuyer tax credit at the end of April," said Lennar president and chief executive Suart Miller.

"Although high unemployment and foreclosures have continued to present challenges for the national housing market, our communities have been less impacted than the broader market.

"In the context of today's market conditions, we have remained focused on improving our core business and are very pleased to report net earnings of $30 million for our third quarter. Our intense focus on fundamentals led to a strong third quarter homebuilding operating margin of 7.2%. In addition, we continued to work with our supply chain to lower construction costs, improve cycle times, and leverage our overhead structure," Miller added.

L-1 up on merger news

L-1 Identity 3.75% convertibles due 2027 traded at 99.95 after the merger news, which was up almost a point on the day.

Another pricing source said the L-1 paper was 99.58 bid, compared to 99 bid on Friday.

Shares of the Stamford, Conn.-based identification security company surged $1.94, or 20%, to $11.64 in ultra heavy volume.

Safran SA of France said it will acquire L-1 for a price that represented a 31% premium to L-1's average closing price of $9.14

The deal doesn't include L-1's government consulting-services business, which BAE Systems plc of Britain will purchase for $295.8 million.

CBIZ $100 million deal

The $100 million CBIZ convertibles were talked at a coupon of 5% to 5.5% and a 30% to 35% initial conversion premium.

CBIZ is a Cleveland-based business services provider.

Banc of America Merrill Lynch is bookrunner of the Rule 144A offering, which has an over-allotment option for a further $15 million.

Proceeds will be used refinance the company's 3.125% convertibles, which were issued in 2006 and are callable in June 2011.

CBIZ may use funds from the new offering to repurchase some of those notes from time to time and also for general corporate purposes, including repayment of a existing balances under its senior credit facility. Up to 25% of the proceeds may be used to repurchase of common stock.

There are no calls. There is contingent conversion with a trigger at 135% of the conversion price. And the convertibles have net-share settlement, providing for the principal amount to be repaid in cash.

Mentioned in this article:

CBIZ Inc. Nasdaq: CBZ

Digital Realty Trust Inc. NYSE: DLR

Lennar Corp. NYSE: LEN

L-1 Indentity Solutions Inc. NYSE: ID

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