Pier 1 lower on weak sales; Red Hat holds on Novell-Microsoft deal; Medical Properties, Medis deals quiet

By Kenneth Lim

Boston, Nov. 2 - The convertible bond market had an active session on Thursday, with Pier 1 Imports Inc. slipping outright after the company reported weaker sales for October.

Red Hat Inc. held steady amid an afternoon sell-down in the stock, as a recently announced debt buyback lent support to the convertibles despite news of a deal between rival Novell Inc. and Microsoft Corp.

Medical Properties Trust Inc.'s new exchangeables were quoted higher on their trading debut, but market sources reported little activity despite strong initial demand for the paper.

Meanwhile, Medis Technologies Ltd.'s planned $50 million offering of perpetual convertible preferreds was quiet in the gray market amid concern about a poor stock borrow.

Pier 1 slips on sales

Pier 1's 6.375% convertible due 2036 traded about 1.25 points lower outright on Thursday, but improved slightly on a dollar-neutral basis after the company reported weaker same-store sales for October.

The convertible closed at 92.25 bid, 93 offered against a stock price of $6.18. Pier 1 stock (NYSE: PIR) closed at $6.18, down by 5.07% or 33 cents.

"We traded a bunch of Pier 1s today," a sellside convertible bond trader said. "On a dollar-neutral basis they are about 3/8 point better."

Pier 1 on Thursday said October sales in stores that were open for at least a year dropped 13.7%, bringing total sales in October to $114.1 million, a 13.1% decrease. October was the ninth straight month of declines for Pier 1, a Fort Worth, Texas-based home furnishings retailer.

UBS equity analyst Brian Nagel on Thursday kept his neutral recommendation on the stock, saying there was no sign of a turnaround anytime soon.

"Weakness at Pier 1 reflects internal missteps and issues in the home accessory category," Nagel wrote in a note.

Red Hat firm against rival's deal

Red Hat's 0.5% convertible due 2024 was less than a point lower outright on Thursday, holding steady as the stock fell on news that rival Novell had struck an alliance with Microsoft.

The Red Hat convertible closed at 96.125 versus a stock price of $16.10. Red Hat stock (Nasdaq: RHAT) closed at $16.10, a 2.01% or 33-cent decline.

Novell's 0.5% convertible due 2024, meanwhile, was quiet. Novell is currently seeking consents from holders of the convertible amid delays in its financial filings. The consent solicitation deadline expired Thursday at 5 p.m. ET.

Novell and Microsoft on Thursday entered into an agreement that will let Novell's open-source Linux software work with Microsoft's Windows operating system. Waltham, Mass.-based Novell and Raleigh, N.C.-based Red Hat develop Linux-based software.

Novell stock (Nasdaq: NOVL) shot up 15.67% or 92 cents on the deal.

The news came a week after Oracle Corp. also took a big step into the Linux market, announcing that it would offer maintenance services similar to what Red Hat was charging, and at a discount.

"I don't think there's any question now that the Linux market is going to be a lot more competitive from Red Hat's standpoint," a convertible bond analyst said.

"They could lose some market share going forward in terms of their enterprise clients, so it's definitely going to be interesting to see how they respond to this, if they can. The risk that they've always had is that their product is open source, but you would think people would have already considered that before all these news."

"It's not great news for the stock, but the credit's still the same," the analyst added.

A sellside convertible bond trader noted that Red Hat's recently announced buyback program was helping to support the convertible. Red Hat said Oct. 27 it was buying back up to $75 million of the convertibles by Oct. 31, 2007.

"The [Red Hat] stock initially took a bit of a hit given the Novell news, but those bonds are holding nicely due to the company's announced buyback last week," the trader said.

Medical Properties gains

Medical Properties' new 6.125% exchangeable senior note due 2011 was quoted 2 to 3 points higher before the market opened Thursday, but trading was largely quiet the rest of the day, market sources said.

The exchangeable, which was sold at par, was 102.25 bid, 103.5 offered against a stock price of $13.53 early Thursday. Medical Properties stock (NYSE: MPW) slipped 0.59% or 8 cents to close at $13.45.

"It looks to me like they were very quiet," a sellside convertible bond trader said. "Not a whole lot was trading. The Street brokers, it looks like they gave up before it even opened."

The upsized $125 million deal priced at the rich end of talk late Wednesday, with a coupon of 6.125% and an initial exchange premium of 22.5%.

The notes were offered at par, and talked at a coupon of 6.125% to 6.625% and an initial exchange premium of 17.5% to 22.5%. The size of the deal was originally $100 million, with an over-allotment option for a further $15 million. The greenshoe has been reduced to $13 million.

UBS Investment Bank and JP Morgan were the bookrunners of the Rule 144A offering.

Medical Properties, a Birmingham, Ala.-based real estate investment trust that develops and leases healthcare facilities, said part of the proceeds will be used to complete its planned $90 million acquisition of six facilities during the fourth quarter of 2006. It will also use the proceeds to reduce its revolving debt and to pay for capped call transactions.

"It looks like it was still fairly interesting where it came," a sellside convertible bond analyst said. "I've heard that there were bids, so maybe nobody's selling."

Medis borrow a concern

Medis Technologies' planned $50 million offering of perpetual convertible preferred stock was quiet in the gray market on Thursday amid concerns about the borrow on the common.

"Not a peep," a sellsider said of the name in the gray market.

The deal was expected to price after the market closed, with talk guiding for a dividend of 6.5% to 7.25% and an initial conversion premium of 28% to 32%.

The 5,000 preferred shares were offered at par of $10,000 apiece. There is a concurrent shelf offering of up to 1.5 million shares of Medis common stock.

There is an over-allotment option for a further $7.5 million, or 750 preferred shares, in the convertible deal.

Citigroup was the bookrunner for the Rule 144A offering.

Medis, a New York-based maker of fuel cell batteries used in consumer and military electronics, said the proceeds of the offering will be used for developing and commercializing products, which may include capacity expansion, and for general purposes.

"The borrow is fairly difficult," a convertible bond analyst said, adding that the deal modeled just over a point cheap with a volatility of 37% and a credit spread of Libor plus 500 basis points, after the borrow was factored into the calculations.

A convertible bond trader also reckoned that the borrow could turn out to be an issue for the name.

"It looks like the short interest is very, very high," the trader said. "It could be that the borrow's going to be a problem."

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