Lennar launches new deal; Existing Lennar slips; Frontline tumbles; Gilead bounces some

By Rebecca Melvin

New York, Nov. 22 - Lennar Corp.'s existing convertible bonds slipped some Tuesday immediately after the Miami-based homebuilder and financial services provider launched a new offering of convertibles seen pricing after the market close.

The homebuilder's new deal wasn't viewed as cheap to the existing paper, however, according to one East Coast-based buysider, who said his firm was not getting involved in the new offering.

Frontline Ltd.'s convertibles fell after the Norwegian-based oil tanker giant reported a third-quarter loss and said it may miss debt payments before the end of the year and that it faces the possibility of running out of cash early next year unless the broader market recovers.

Weaker demand has been weighing on the shipping sector as an excess of vessel supply in early 2010 has outpaced global oil demand, the company said. Last week General Maritime Corp. filed for bankruptcy protection.

On a brighter note, Medtronic Inc. was firmer after the world's largest medical device maker reported higher-than-expected earnings and reaffirmed its full-year earnings outlook.

Gilead Sciences Inc. bounced some, retracing some of the outright drop suffered Monday after the Foster City, Calif.-based biopharmaceutical company announced a pricey, $11 billion acquisition of a maker of hepatitis C therapies.

Equities also bounced after word that the International Monetary Fund was going to institute some new lending tools for the benefit of euro zone nations, including pre-application procedures and lowered standards to qualify for loans.

In addition, equity players were heartened by the minutes of the latest FOMC meeting that indicated another round of quantitative easing, or QE3, is something that's on the table.

Also stateside, there was a downward revision in U.S. gross domestic product. The U.S. Commerce Department said the U.S. economy grew at an annual rate of 2% for the third quarter, which was lower than an initial 2.5% estimate made last month. The cause cited was inventory reductions.

The government also said after-tax incomes fell by the largest amount in two years, or at a 2.1% rate, which is due to high unemployment and lower pay raises. That was more than the 1.7% decline initially estimated and the biggest drop since the third quarter of 2009.

New Lennar not turning heads

Lennar's existing convertibles looked cheap compared to the new paper, and market players questioned whether buyers would just add to old paper holdings rather than buy the new deal.

"I'm surprised it's getting done as easily as it appears to be getting done," a buysider said "We're going to skip it."

A second source concurred, citing the existing 2.75% Lennar convertible as having a current yield of 2.625% and 33% premium, which looked more attractive compared to the 3% coupon, 40% premium of the new paper at the midpoint of talk.

"You get a little less yield but more premium, and it's a year shorter," the market source said of the older 2.75% convertibles.

Nevertheless, Lennar's existing 2.75% convertibles due 2020 traded down during the session at least on an outright basis, changing hands at 102 versus an underlying share price of $16.96 on Tuesday, after the new deal was announced, compared to 106 versus an underlying share price of $17.65 on Monday, according to a New York-based sellsider.

The Lennar 2.75% convertibles were an upsized $435 million deal that came with a 40% premium at this time last year. The paper has its first call and put on Dec. 15, 2015, and its conversion price is $22.13.

Lennar's 2% convertibles due 2020 changed hands Tuesday at 98 versus the $16.95 share price, which was down slightly from 98.5 versus an underlying share price of $17.65.

The Lennar 2% convertible priced six months earlier than the 2.75% deal, and the $276.5 million deal has its first put December 2014, with a higher conversion price of $27.64.

Lennar shares settled down 23 cents, or 1.3%, to $17.09.

The new $300 million Lennar convertible was talked to yield 2.75% to 3.25%, with an initial conversion premium of 37.5% to 42.5%.

Lennar upsized, priced

After the market close, Lennar sold an upsized $350 million issue of 10-year convertible senior notes at par to yield 3.25% with an initial conversion premium of 37.5%. The greenshoe was upsized to $50 million from $45 million.

The Rule 144A deal was priced via J.P. Morgan Securities LLC and Citigroup Global Markets Inc. Deutsche Bank Securities Inc. was added as a co-manager after the initial launch.

The new Lennar is callable and putable in November 2016. Conversion will be settled in stock only. There is standard takeover and dividend protection.

Proceeds will be used for general corporate purposes, which may include repayment of outstanding debt and potential acquisitions of real estate or financial investments.

Frontline tumbles

Frontline's 4.5% convertible senior notes due 2015 looked to have dropped to 27 bid, 32 offered from a previous level of about 40.

Frontline shares plunged $2.13, or 41%, to $3.06 on Tuesday.

"The company, which has never really had any transparency in terms of covenants, revealed that it could potentially breach by the end of the year," a Connecticut-based sellside analyst said.

The Frontline convertible is a $225 million issue that priced in March 2010 and matures in 2015.

The company announced a $136 million third-quarter loss, compared to a $48.4 million profit for the same period last year. Revenue fell 44% to $174 million.

The company said that tanker freight rates on many routes were negative for much of the quarter and asset values collapsed, and it said it will likely need new funding in the first part of 2012. In addition, there were significant uncertainties about its ability to comply with banking covenants at the end of the current quarter.

Frontline said it was in discussions with creditors and counterparties about restructuring.

Gilead bounces a little

Gilead's 0.625% convertibles due 2013 traded at 112 versus an underlying share price of $38.05, compared to 108.5 versus an underlying share price of $35.85 on Monday.

Prior to news of the Pharmasset acquisition, the 0.625% convertibles were seen trading at 116.5 versus an underlying share price of $40.65 on Friday.

Pharmasset is developing a drug code-named PSI-7977, which Gilead believes could become part of the first all-oral regimen for hepatitis C, with potential U.S. regulatory approval in 2014. Pharmasset also has other potential hepatitis C drugs in the pipeline.

The $11 billion price tag for Pharmasset highlights stiff competition among drug makers in advance of new treatments for hepatitis C.

Mentioned in this article:

Frontline Ltd. NYSE: FRO

Gilead Sciences Inc. Nasdaq: GILD

Lennar Corp. NYSE: LEN

Medtronic Inc. NYSE: MDT

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