Convertibles lag broader markets; AMR bounces a little; Lennar, Electronic Arts higher

By Rebecca Melvin

New York, Nov. 30 - The convertible bond market was "slow" on Wednesday, despite an exceptionally strong rally in the broader markets as investors affirmed a coordinated move by the Federal Reserve and other central banks to boost liquidity to banks hit by Europe's debt crisis. The other central banks involved included those of Canada, the United Kingdom, the euro zone, Japan and Switzerland.

The Dow Jones industrial average rallied 490 points; nevertheless, "the convert market seemed to be lagging the move up in equities and credit," a convertibles trader said. It was "super slow."

A second trader called the tone of the market "passive," while a third said there were buyers for better credits, but it was quiet overall.

A number of convertible bonds were trading better outright, however.

AMR Corp.'s convertibles bounced a little bit, back up to the 20 mark, after collapsing more than 25 points into the upper teens on Tuesday after the Fort Worth, Texas-based parent company of American Airlines filed for bankruptcy.

Lennar Corp.'s newer 3.25% convertibles, which priced last week, moved up substantially to 103.5 versus an underlying share price of $18.05. Shares of the Miami-based homebuilder, which often move in tandem with whether prospects for economic activity are better or worse, were also higher. Raymond James raised its rating on the company's shares to "outperform" from "market perform."

Electronic Arts Inc.'s convertibles extended gains as the underlying equity of the Redwood City, Calif.-based video game maker were also regaining ground following a recent pullback of some 17%.

NuVasive Inc. was improving and L-3 Communications Holdings Inc. was trading in size at 99.75 bid, 95.875 offered, according to a New York-based sellside trader.

The whipsawing markets didn't seem to require convertibles players to do anything, and it was quiet even for month end.

AMR bounces slightly

AMR's 6.25% convertibles due 2014 traded at 20 on Wednesday, which was up from 16.125 bid, 16.875 offered on Tuesday following the company's Chapter 11 bankruptcy filing. The bonds had traded at 42 versus an underlying share price of $1.65 on Monday and at 43 versus the same $1.65 share price last week.

There could be numerous factors behind the couple of points rise, a trader said. There may be more confidence about recovery or it could have been oversold, he suggested.

AMR had $4.1 billion in unrestricted cash on its books when it filed. This allows it to begin restructuring before it burned through all that cash.

Lennar gains

Lennar's new 3.25% convertible bonds, which priced last Tuesday, traded up to 103.5 versus an underlying share of $18.05, which was up compared to 100.5 on Monday.

Lennar's older 2% convertibles traded at 99 versus the same underlying share price of $18.05. The 2% convertibles traded last week little changed after the new Lennar launch at 98.

Shares of the homebuilder gained $1.39, or 8%, to $18.41 in heavy volume.

A convertibles trader said that the pull higher would be equally as strong on the convertibles as on the underlying shares given that Lennar's sector is particularly sensitive to prospects for economic growth. "The common is up a lot too on big volume" the trader said.

Raymond James analysts upgraded Lennar and other homebuilders as they changed their recommendation on housing.

"Part of the rationale behind our call is driven by a combination of modestly positive domestic economic data points, optimistic builder commentary, higher consumer confidence numbers, improving purchase application data and new legislative support aimed at housing - all of which, in our view, has helped provide the necessary backdrop for an eighth consecutive 'hope trade' ahead of the 2012 spring selling season," the Raymond James analysts wrote in a research note.

Even though December and January are among the slowest months for new home sales, it has typically been a good time to own homebuilding equities, the Raymond James analysts including Buck Horne wrote.

The so-called "hope trade" has been successful seven years in a row, the analysts wrote. But unfortunately Europe is a wild card this year, and the potential of Europe's financial problems spreading to the United States remains a real risk.

"Unfortunately, Europe is difficult for us to handicap given the range of potential outcomes, but we think recent developments have at least calmed investor fears of an imminent collapse, for now," the Raymond James analysts wrote.

Electronic Arts recouping

Electronic Arts' 0.75% of 2016 traded at 101.25 versus an underlying share price of $22.85 on Wednesday, which was up from roughly 99.25 versus a $22.00 stock price on Tuesday and at 97 versus an underlying share price of $20.85 early Monday.

Shares of the Redwood City, Calif.-based video game maker gained $1.50, or 7%, to $23.19 in average volume on Wednesday.

At the 99.25 versus $22.00 stock price, the bonds are trading with a 0.9% yield and 42.8% premium. The paper came with a 35% premium.

Citigroup upgraded the shares to a "buy" on Monday, citing the recent pullback combined with solid Black Friday sales for a more compelling valuation.

Mentioned in this article:

AMR Corp. NYSE: AMR

Electronic Arts Inc. Nasdaq: ERTS

Lennar Corp. NYSE: LEN

L-3 Communications Holdings Inc. NYSE: LLL

NuVasive Inc. Nasdaq: NUVA

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