U.S. investors brace for home builder convertibles

Wed Jun 16, 2004

NEW YORK, June 16 (Reuters) - After two convertible bond sales by U.S. home builders in recent weeks, some analysts and portfolio managers are bracing more convertible issuance from the sector.
Homebuilders have been hit in the stock and bonds markets recently as investors have prepared for higher borrowing rates to choke off demand for homes.

The Dow Jones Home Construction Index , an index of home builder stocks, has fallen 20 percent off its peak in March. In the corporate bond market, the average risk premiums for speculative-grade home builder bonds have risen 18 percent since March, according to Merrill Lynch indexes.

But homebuilders themselves are not trimming their growth expectations as rates rise, and with the stock and bond markets punishing the builders, convertibles might be a cheaper way for builders to raise capital now, said John Everhart, convertible bond portfolio manager at American Express Financial Advisors in Minneapolis.

"It might be an interesting spot for more issuance," Everhart said.

With convertible issuance so far in 2004 almost 30 percent below its levels at the same time last year, investors are keen for new bonds in general.

Earlier this month, Beazer Homes USA Inc. (BZH.N: Quote, Profile, Research) sold $150 million of 20-year convertible notes, with a coupon of 4-5/8 percent. If the company's stock rises 55.5 percent, investors can convert the notes into 6.48 shares of the company's stock. Beazer's deal followed a $65 million convertible sale last month from Palm Harbor Homes Inc. (PHHM.O: Quote, Profile, Research) .

Not everyone is convinced that a wave of home builder convertible issuance is coming. The largest home builders have investment-grade debt ratings, and even if their bonds have recently sold off relative to Treasuries, the yields at which these issuers can borrow are still low in absolute terms, said Larry Angelilli, senior vice president in finance at Centex Corp. in Dallas.

Plus, homebuilders generally are flush with cash after a housing boom that began in 2001, which limits their need to raise capital, said John Wagner, managing partner at Camden Asset Management in Los Angeles.

But declines in the housing market may spur consolidation, which could spur issuance in the sector, said Stu Novick, convertible research analyst at Citigroup Global Markets, an underwriter for both the Beazer and the Palm Harbor sales.

One thing is clear: the convertible market is hungry for new issuance. So far this year, about $27 billion of convertibles have been issued, according to Citigroup, down about 30 percent from the same time last year.

The decline is partly because concerns about rising interest rates led many issuers to sell convertibles late last year.

Meanwhile, convertibles are most attractive for issuers when there is high uncertainty in the equity markets, which makes the option to convert the bond into stock more valuable. With uncertainty low, as measured by equity volatility levels in the options markets, issuers are broadly shying away from raising money with convertibles.





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