Lennar (LEN) new issue 04/26/10

$250m (+37.5m) 144a sen cb pricing tonight from JPM/Citi Terms: 10yr, 1.5-2% up 37.5-42.5, put/call 3.6 yr (12/1/13), t/o & dvd prot. Concurrent $200m straight deal. UOP=debt repayment. Lennar is one of the largest homebuilders in the US. Stk has recouped losses from last 3 yrs. 5 yr CDS 260-270. We’ll be conservative and use the 270 offered side for this shorter duration. Vol in past few yrs has been 50+. We’ll use 35: 101.75/102.5/104. Another issuer taking advantage of tight credit markets. With rich optics, we fear this deal is just another model trap. DHI originally traded poorly for same reasons. But now we’d rather own DHI on swap for the vol skew. Given recent primary cheapness, only play CHEAPs (if you want housing exp and 30 implied vol.

Sterne Agee-

– Opinion: Using L+330 / 35 vol, the new Lennar cvts model 0.5% chp at mids; spread is based on where ’13 paper traded earlier today; CDS around 200 bp 3 yr; 270 bp 5 yr. Vol has come way in, so I’m using recent 5 day historical of 35%. I don’t think the structure is good for hedgies, or outrights for that matter; there’s just an awful lot of premium here. Maybe the bonds are a little better setup vs CDS, but overall I’d say not very interesting, buy cheaps at best.
– Lennar Corporation; $250 mm + 15% shoe; senior convertible notes; 1.5% – 2.0%; up 37.5% – 42.5%; 10.5 yr; HC 3.5; puts 3.5,5.5 yr; standard takeout and dividend protection; cv settlement stock only; UOP to finance tender for outstanding debt maturities and general working capital; concurrent with offering of $250 mm 8 yr senior unsecured notes; 144a; JPM, Citi leads, with WFC,DB,UBS as co-mgrs. Pricing tonight for tomorrow. LEN is rated B3 (sr) by Moody’s.
– LEN did some of the heavy lifting on improving its credit outlook last year when it issued $400 mm of 12.5% senior notes and began taking out near-term debt maturities and reducing JV recourse debt exposure. This latest deal, which is concurrent with a $250 mm senior straights offering, does more of the same, and will be followed by a waterfall tender for $200 mm of near-term debt. Liquidity is solid with about $1.4 bn in cash and investments, and total homebuilder debt only moves up slightly to 55% of capital (45% on a net basis) as a result of this deal. Moody’s raised its outlook to positive from stable today, while Fitch rates the notes BB+ (Neg).

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