Convertibles still weak: Chesapeake 'comes in' on sellers; Meritor drops; Lennar mixed

By Rebecca Melvin

New York, June 25 - Convertible bonds were weak again on Tuesday despite a rebound in equities, while trading action remained lethargic as sellers enticed some buyers out of the woodwork, but left most holders unmoved.

One name hit by selling was Chesapeake Energy Corp. The Oklahoma City-based natural gas company's multiple convertible bond issues were down 0.5 point to a point, market sources said.

Chesapeake "came in" on sellers looking to raise cash, one New York-based trader said.

Also lower were Meritor Inc.'s 4% convertibles, which look to have dropped 4 or 5 points from the middle of last week, a New York-based trader said.

It wasn't clear whether the downdraft on Meritor was caused by a large seller or due to a fundamental concern, the trader said.

Lennar Corp.'s convertibles were mixed in active trade Tuesday after the Miami-based homebuilder posted strong second-quarter earnings that beat profit and revenue estimates. But its volume outlook fell short of expectations, so neither the bonds nor the shares responded wholeheartedly.

Lennar's shares pared gains to end up 0.7%. Lennar's 2.75% convertibles due 2020 outperformed both the Lennar 3.25% convertibles due 2021 and the Lennar 2% convertibles due 2020.

Weakness in the convertible bond market has persisted since the middle of last week when Federal Reserve chairman Ben Bernanke said that the central bank's accommodative policies will be peeled back amid continuing improvement in the labor market and the economy in general.

Convertible bonds were mostly lower on light volume on Monday and anemic on Friday when market players mostly sat on the sidelines amid volatile stock and Treasury markets. The primary market has been quiet so far this week.

Stocks on Tuesday swung back to strong gains following positive economic data in durable home goods, which beat estimates, and home sales, which jumped in May to near a five-year high.

U.S. Treasuries were lower. The benchmark 10-year Treasury notes fell 14/32 in price to yield 2.595% by early afternoon, up from 2.544% late Monday.

Lennar said that recent interest rate increases has not affected its sales and that it is well positioned for another year of housing profitability.

The S&P 500 stock index swung back to gains, ending up 14.94, or 0.95%, to 1,588.03; the Dow Jones industrial average added 100.75 points, 0.7%, to 14,760.31; and the Nasdaq stock market gained 27.13 points, or 0.8%, to 3,347.89.

Chesapeake 'comes in'

Chesapeake's 2.5% convertibles due 2037 (Cusip: 65167BZ9) - one of the company's larger convert issues - were trading at 94 during the session, which was down 0.9 point. But after the market close, the paper traded at 95, which was actually up about 0.125 point, according to Trace data.

The Chesapeake 2.75% convertibles were noted as the company's most actively traded convertible, and they were lower by nearly a point, sources said.

The Chesapeake convertibles were changing hands "more actively today as we are seeing sellers," a New York-based convertibles analyst said. He said that the bonds had come in about a point, but added that there wasn't "much color here on what is bringing the sellers out."

Shares of the Oklahoma-based natural gas company were up 1% at $19.79, up 19 cents.

The question remained, one trader said, whether the selling was redemption related or because the holder wanted to put money to work in more risky names.

Meritor 'down considerably'

Meritor 4% convertibles due 2027 were said to be "in" 4 or 5 points to 88.75 bid, 88 offered on Tuesday from 91.5 bid, 92 offered last week.

The bonds are not equity sensitive. Indeed, they trade with a 300% premium. But the move was in sharp contrast to the shares of the Troy, Mich.-based truck parts maker, which jumped 6.6% on Tuesday to $6.77, which was up 42 cents.

A trader said "the bonds are down considerably from where they were," but he didn't know why. He noted that an 87.5 bid was actually canceled by the potential buyer.

"He pulled the bid," the trader said, noting that liquidity is a problem for the market right now, and that "everything is coming in."

Lennar mixed after earnings

Lennar's trio of convertible bonds was very active post-earnings, a New York-based convertibles analyst said.

The Lennar's 2.75% convertibles due 2020 "outperformed the pack by climbing 0.375 points dollar-neutral on an 85% delta," the analyst said.

That compared to the Lennar 3.25% convertibles due 2021, which were only 0.125 points better, and the Lennar 2% convertibles due 2021, which came in about 0.375 point on a hedged basis.

Lennar shares added 24 cents, or 0.7%, to $35.23.

The Miami-based homebuilder said that despite recent rate increases, the company has seen little impact on sales or pricing.

The company, which is the third largest U.S. homebuilder, reported stronger-than-expected revenue for its second quarter ended May 31 as it sold more homes at higher prices. Orders jumped 27% to 5,705 homes in the spring selling season.

Average home selling price rose 13% to $283,000 for the three months.

As for net income, it fell to $137.4 million, or 61 cents per share, from $452.7 million, or $2.06 per share in the year earlier period when Lennar had a $403 million tax benefit.

But profit of 61 cents per share was better than the 33 cents per share that analysts had been expecting.

Revenue jumped 53% to $1.43 billion, which was better than the $1.33 billion analysts on average had expected.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Lennar Corp. NYSE: LEN

Meritor Inc. Nasdaq: MTOR

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