Lennar, KB Home flat to lower on hedge; LifePoint in line after weakness; Maiden on tap

By Rebecca Melvin

New York, Sept. 24 - Homebuilders were in focus in the convertible secondary market on Tuesday after both Lennar Corp. and KB Home reported strong quarterly earnings and the shares of those companies moved higher.

Lennar's 2% convertibles due 2020 were higher outright but came in about 0.25 point on dollar-neutral, or hedged, basis in the early going after the Miami-based homebuilder beat earnings estimates and shares traded up 5%. Later the bonds were called flat to slightly lower, with the stock finishing 4% higher.

KB Homes reported higher quarterly profit as prices gained, and the underlying shares also ended 4% higher.

Vigor continued to elude the convertible bond market in the absence of new issuance in the United States so far this week, traders said. Although, after the market close, Maiden Holdings Ltd. helped the cause by launching an offering of $135 million of three-year mandatory convertible preferred shares expected to price after the market close Wednesday.

Otherwise, there is a lack of catalysts with which to lure market players into trade, a New York-based trader said.

"Why should anyone do anything?" the trader asked, citing uncertainty ratcheting up over the Federal government budget talks and fears of a government shutdown as the Affordable Care Act continues to be debated.

"It's still very quiet," with more sellers than buyers, the trader said.

Elsewhere, LifePoint Hospitals Inc.'s 3.5% convertibles due May 2014 steadied after weakness in the past week pushed those bonds lower by about a point, a New York-based trader said.

A second New York-based trader said there have been sellers around in the LifePoint bonds.

Equities waivered but ended mostly lower. The S&P 500 stock index and the Dow Jones industrial average spent a good part of the session in positive territory but sold off into the close, marking a fourth straight down day. The S&P slipped 4.42 points, or 0.3%, to 1,697.42; the Dow ended down 66.79 points, or 0.4%, to 15,334.59; but the Nasdaq stock market edged up 2.97 points to 3,768.25.

Lennar slips on hedge

Lennar's 2% convertibles due 2020 traded at 130.25 bid, 130.75 offered in early action versus an underlying share price of $35.85. That was a bit higher on an outright basis but represented a 0.25 point contraction on a dollar-neutral, or hedged, basis, sources said.

Later one trader called the Lennar complex essentially unchanged with shares ending the day higher than that swap price at $36.01.

Lennar's 2.75% convertibles due 2020 were seen at about 171 bid, 171.5 offered, and Lennar's 3.25% convertibles due 2021 traded at 168.5 bid, 169 offered.

For the third quarter ended Aug. 31, Lennar reported net earnings of $120.7 million, or 54 cents a share, up from $87.1 million, or 40 cents a share, in the year-earlier period. The latest quarter included a $67.2 million tax provision, while the year-ago quarter included a $12.8 million tax benefit.

Deliveries were up 37% at 4,990 homes. New orders were up 14% at 4,785 homes representing a $1.5 billion value, which was up 32%. But orders slowed from the second quarter when they were up 27%.

Revenue for the third quarter rose 46% to $1.6 billion. Analysts had expected the company to earn 45 cents per share on $1.56 billion in revenue.

Also on Tuesday, S&P/Case-Shiller home price indices were released showing U.S. home prices increased 1.9% and 1.8% in July from June for the 10-city and 20-city composites, respectively, while home prices rose 12.1% for the 12 months ended in June, but was down slightly from a 12.2% gain for the 12 months ended in May. Subsequent signs of slowing emerged with a jump in mortgage rates in June by a percentage point. Currently, mortgage rates stand at a two-year high.

KB Home little changed

KB Home's 1.375% convertibles due 2019 traded as high as 100.75, which was up 1.223 points on the day and also lower at 100.25. On Monday that paper was seen with a 98 and 99 handle.

KB Home's shares rose 73 cents, or 4.3%, to $17.76 in heavy volume.

For the third quarter ended Aug. 31, the Los Angeles-based homebuilder reported a profit of $27.3 million, or 30 cents a share, up from $3.3 million, or 4 cents a share, a year earlier. Revenue jumped 29% to $549 million.

The results were better than analysts' estimates, which predicted earnings of 23 cents a share.

Orders fell to 1,736 homes, which was down 9% from 1,900 a year earlier.

KB home priced its $230 million of 1.275% 5.5-year convertibles in January. Pricing went to as high as 120 ish by May and then peeled back.

LifePoint weaker

LifePoint's 3.5% convertibles due 2014 ended the session at 104.5 bid, 105 offered versus an underlying share price of $45.65, a New York-based trader said. That was little changed to slightly lower compared to trades on Monday at 104.54 and 105.125.

Shares of the Brentwood, Tenn.-based rural hospital owner and operator were off 5 cents in early action, but ended down 38 cents, or 0.8%, at $45.65.

"It seems a little heavy," a New York-based trader said of the bonds. "They are mostly for sale. The valuation is not great; it's not terrible, but not great, so why wouldn't people take a little off the table right here."

He said the paper seemed "right in line to slightly lower."

Maiden to price

Maiden Holdings, a Hamilton, Bermuda-based reinsurance holding company, launched an offering of $135 million three-year mandatory convertible preferred shares, with $50 par, that were talked to yield 7% to 7.5% with an initial conversion premium of 22.5% to 27.5%, according to a syndicate source.

The registered deal of series B preference shares was seen pricing after the market close on Wednesday.

The deal has a $15 million greenshoe and was being sold via joint boorunning managers Goldman Sachs & Co., Morgan Stanley & Co. LLC and BofA Merrill Lynch. Wells Fargo Securities is a joint lead manager, and co-managers are FBR, Sterne Agee & Leach and JMP Securities.

Proceeds will be used for general corporate purposes, primarily to support continuing growth of its reinsurance operations, with remaining proceeds to be invested in marketable fixed income securities and short-term investments.

Mentioned in this article:

Lennar Corp. NYSE: LEN

LifePoint Hospitals Inc. Nasdaq: LPNT

KB Homes NYSE: KBH

Maiden Holdings Ltd. Nasdaq: MHLD

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