Players sidelined, perplexed by corporate spending forecasts; rising star Lennar shines

By Ronda Fears

Nashville, Jan. 16 - The sidelines remained packed with convertible players trying to digest earnings reports and the wide range of forecasts for corporate spending this year.

"We did not do a lot today in converts. People are mulling over the earnings, and unless there's a blow up, no one's moving," said the head convertible trader at a major investment bank.

"It's difficult to get a grasp on what's going to happen, in terms of corporate spending. It depends on who you believe, [because] the forecasts are so different. There's also the possibility of war weighing on everyone's minds."

Rao Aisola, head of convertible research at Bear Stearns & Co., said there was "hardly any volume" on convert trading desks as no one is staking out positions right now.

New issues will improve flow but still no one anticipates much of a pick-up until after the earnings flood subsides.

"To come out with a new issue during the earning season is not a good idea unless you're going to have blow-out numbers," Aisola said.

To some extent, at least for the tech sector, the market was looking to results from IBM and Microsoft after the close to provide more insight.

But already, with high-profile tech names like Intel casting a pall on spending, other groups like telecom and telecom equipment makers were showing weakness.

With war fears climbing on news of empty chemical warheads found in Iraq, Treasuries were better and corporate bonds also firmed.

Lennar Corp. was a bright spot on the credit front, becoming one of few in the rising star limelight.

Moody's upgraded most of Lennar Corp.'s senior credit into investment-grade territory, including the 0% convertible senior debentures due 2018 to Baa3 from Ba1.

Lennar's 0% convertible senior subordinated notes due 2021 remained behind in junk territory, however, but were upgraded to Ba2 from Ba3.

All of Lennar's public notes are guaranteed by operating subsidiaries with the exception of the converts due 2021, Moody's noted, which accounts for the two-notch ratings difference.

Observing that Lennar has never posted a net loss in its tenure as a public company, Moody's pointed out that despite an energetic acquisition strategy, Lennar lowered its debt leverage last year and its interest coverage advanced strongly.

While volume was low, traders noted telecoms and techs were marked lower again and Charter Communications Inc. continued to slide as fears about the cable company going into default kept investors on edge.

State Street Corp.'s new deal, however, moved up another 1.375 points to 206 bid, 206.375 asked. The stock ended up 26c to $40.36.

For a couple of weeks now, sources have been talking about traditional U.S. players and some Bermuda-based hedge funds looking to European issues.

It is still a small universe to pick from, as new issues remain the focus overseas, said a New York based hedge fund manager.

But the prospects may be rosier for a gain in new issues in Europe, which suffered from the same setbacks as the U.S. in 2002 - falling equity prices and crumbling credit quality.

Barclays Capital is looking for European convertible issuance to account for its forecasted 20% gain in global convertible issuance in 2003, according to the annual report from the firm's convertible research team released Thursday.

European convertible issuance is roughly estimated at $35 billion for 2003, up from about $23 billion in 2002. U.S. issuance is projected to be flattish with last year at about $55 billion, as is Asian issuance at about $10 billion.

Luke Olsen, head of convertible research at Barclays, said a heavy redemption schedule in 2003 should help the pace of new issues, but strong demand will be a driving force. Also, he said convertibles should remain attractive to issuers in the unfolding financing climate of a bias toward rising interest rates.

Still, Olsen said that demand could cool if supply does not keep pace, because investors with money needing to be put to work may begin to look elsewhere as returns are tough to come by in the secondary market.

He said that while the year-end CSFB/Tremont data shows a net inflow into convertible arbitrage of $2.43 billion, far below the $13.7 billion in 2001, inflows for fourth quarter were stronger, "and we would expect this positive sentiment towards the asset class to continue, at least for the first few months of the new year."

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