Lennar (LEN) new issue 11/22/11

$300m (+45m) sen unsec cb coming tonight from JPM/CITI Terms: 10yr, 5yr put/call, full pctns. UOP=debt repurchase/gcp. 2 existing CBs; 2% (01/12/13), 2.75% (20/12/15). Latter = 2.6% +34% x/par +41% 5yr CDS = 425/450. We’ll use L+400 for 4 yr 2.75% = 26 iv. 01/14 25c indicated 46iv bid, 2 yr 50/10%ile = 42/29%. We’ll use 35v on both. Theo= 104.6/106.4/108.3 vs 2.75%=5.25 points cheap. Both are cheap but both are model traps. A lot of mkt won’t buy CDS, nor will they get long LEN credit at this level. Both valuations are on top of each other so little reason to own 1 yr longer duration. Now, if the NEW comes on cheaps, add the more liquid on the run 5yr CDS into equation, then we see a BOND vs CDS set up cheaper than 2.75%. We think the book should be built on the cheaps.

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