TriZetto gains in start; MedImmune surges on buyer search; RAIT, Franklin deals seen with subprime risks

By Kenneth Lim

Boston, April 12 - The TriZetto Group Inc. gained on its first day of trading on Thursday on robust demand after its deal priced near the rich end of talk.

MedImmune Inc. climbed on buyout hopes after the company said it hired Goldman Sachs to seek a sale of the company.

RAIT Financial Trust and Franklin Bank Corp. were quiet in the gray market with both deals seen as plays with potential exposure to the troubled subprime mortgage sector, although RAIT's offering captured more attention with its high coupon.

Elsewhere in the secondary market, Pier 1 Imports Inc.'s 6.375% convertible due 2036 saw a couple of trades at about 98.375 against a stock price of $7.90 after the company reported a wider loss. That was the first action for the lightly traded convertible this month.

Pier 1 Imports reported a loss of $58.7 million, or 67 cents per share, for its fiscal fourth quarter. The company lost $10 million, or 11 cents per share, in the year-ago period. Pier 1 is a Fort Worth, Texas-based home furnishings retailer.

"This stock is symptomatic of the takeover premium built into the market," a sellside convertible trader said of Pier 1, which said in 2006 that it was exploring strategic options. "This is like the poster child for takeover premiums. But all they ever do is close stores, mark down inventories, and the company's less and less attractive to buyers, but people still talk about takeover, takeover. This is not like a premium brand name that people are going to chase after."

The trader acknowledged that the convertible hardly traded but said holders are not likely to be happy.

"People do own them, and it's kind of a tough name," the trader said. "I just don't see the value and at some point it's going to fall through."

TriZetto gains on debut

TriZetto's new 1.125% convertible senior note due 2012 gained about a point outright on Thursday after the deal priced near the rich end of talk.

The convertible changed hands at 101 against a stock price of $18.60. It was offered at par. TriZetto stock (Nasdaq: TZIX) closed at $18.68, down by 0.11% or 2 cents.

"It did OK; it traded up a little bit," a buyside convertible trader said.

TriZetto priced the $230 million deal late Wednesday to yield 1.125% with an initial conversion premium of 17.5%. The size of the deal includes $30 million of an over-allotment option that was immediately exercised.

The deal was talked at a coupon of 1.125% to 1.625% and an initial conversion premium of 15% to 20%.

Deutsche Bank, Goldman Sachs and UBS Investment Bank were the bookrunners of the Rule 144A offering.

TriZetto, a Newport Beach, Calif.-based provider of information technology solutions for the health care and insurance sectors, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions and to fund general purposes, which include debt repayment, stock buybacks or acquisitions.

"It was an interesting deal," a buysider said. "They're a decent company with a credit that could be improving and decent volatility. Not a bad deal compared to some of the others we've seen this week."

MedImmune gets boost

MedImmune's 1.375% convertible due 2011 and its 1.625% convertible due 2013 surged about 9 points outright with the stock on Thursday after the company said it was seeking a buyer.

Both convertibles have takeover protection. The 1.375% convertible was marked at 135.625 bid, 136 offered against a stock price of 42, while the 1.625% convertible was marked at 138.375 bid, 139 offered versus the same stock price. MedImmune stock (Nasdaq: MEDI) soared 15.3%, or $5.79, to close the day at $43.63.

"The ones that are in-the-money paper like this, people are going to do OK," a sellside convertible trader said.

MedImmune said Thursday that it had hired Goldman Sachs to explore a possible sale of the company. The Gaithersburg, Md.-based biotech also said it will not comment on the issue until it has an offer or decides against a sale.

The trader said the stock was turning attention to other biotech companies that could also be potential buyout targets. ImClone Systems Inc., which tried and failed in 2006 to find a buyer, could be back in play, the trader said.

"ImClone last year was the poster child of biotech takeovers," the trader said. "I wouldn't be surprised to see that again this year. The difference now is that this year many of the big drug companies have pipeline problems. I think what happened is that a lot of scientists went to places where they have a better chance of getting a grand slam, and that's not at the big guys, so it's at the smaller firms where there's going to be a lot of good research. Maybe this year ImClone will get chased rather than putting themselves up for sale."

ImClone's 1.375% convertible due 2024 did not trade on Thursday but was seen at 93.25 bid, 93.5 offered versus a stock price of $40.85 on Wednesday. ImClone is a New York-based biotech.

A convertible analyst said the biotech sector has always been a hotbed for mergers and acquisitions.

"We've seen a lot of activity and speculation about small biotechs getting buyouts," the analyst said, "but that's nothing unusual. But some of these larger companies like MedImmune getting sucked up by a company like Pfizer is somewhat new. I guess that's somewhat different.

"A $500 million market-cap biotech with one drug in phase 3 getting bought is one thing. Now there's a more advanced company like MedImmune possibly getting bought. But the story really hasn't changed. The big pharmaceutical companies need new drug discoveries to keep their pipelines flowing and keep products on the shelves. Sometimes you can spend time and money to develop it yourself, and sometimes you can just let other people do the experiments."

RAIT, Franklin carry subprime risks

RAIT's planned $275 million offering of 20-year convertible senior notes and Franklin's $100 million of 20-year convertible senior notes were quiet in the gray market on Thursday with investors describing both deals as exposed to subprime lending risks, although RAIT's offering was seen slightly more attractive.

Both deals were expected to price after the market closed.

RAIT's offering was talked at a coupon of 6.75% to 7.25% and an initial conversion premium of 25% to 30%. Its convertibles were offered at par. RAIT stock (NYSE: RAS) increased 4.75% or $1.24 to close at $27.34 on Thursday.

There is an over-allotment option for a further $50 million.

Bear, Stearns & Co. is the bookrunner of the Rule 144A offering.

RAIT, a Philadelphia-based real estate investment trust that provides debt financing options to the real estate industry, said it will use the proceeds of the deal to concurrently buy back up to $75 million of its common shares and to fund general purposes.

"RAS was +2 offered, but that doesn't mean anything without any bids," a sellside convertible trader said. "Not a thing on FBTX."

Franklin's deal was talked at a coupon of 3.5% to 4% and an initial conversion premium of 40% to 45%. Its convertibles were also offered at par.

RBC Capital Markets is the bookrunner of the registered offering.

Franklin, a Houston-based bank, said it will use the proceeds of the deal to pay part of the purchase price of the First National Bank of Bryan in Bryan, Texas.

Interest was mixed for the Franklin deal.

"That's too small of a deal for me," a hedge trader said. "It's a $100 million deal with a lot of subprime exposure. I just didn't want to go there. And at 3.5%, up 40% I can't hedge it up enough."

One buyside convertible analyst said Franklin's subprime exposure was not too severe.

"The credit of the company is probably going to be OK," the buysider said. "They do residential mortgages, but they are a real bank so I'm not too worried about the credit."

But a sellside analyst thought that even with its other banking business Franklin could be a risky play.

"They are a real bank, but their credit stats looked bad at first pass," the sellside analyst said. "Plus they are concentrated in a part of Texas that has/will have real estate and mortgage problems."

Potential subprime risks were also a concern for RAIT, although the deal appeared to draw stronger interest.

"The trouble is it's a tough credit to analyze," the sellside analyst said. "There's very little to compare it to because they're a commercial mortgage REIT, and while there are other companies in that business that you can look at, none of them have rated debt."

The analyst said RAIT's balance sheet has also changed since the end of last year after the company merged with Taberna Realty Finance Trust. The analyst had the deal modeled just fair using a credit spread of about 500 basis points over Treasuries and a volatility assumption in the low 30% range.

"So much of their business is around mortgage origination, which is expected to decline this year and because they rely on CDOs on funding and there's some concern because of subprime contagion into the CDO market...it's hard to say where the credit is right now," the analyst said.

RAIT also has a better common dividend yield, which could make it even less attractive.

"It's not a terrible company, but it's risky stuff and there's nothing to compare it to," the analyst said. "It's a really high coupon and if you set it up on hedge, it's OK...But if it starts to deteriorate at all, your assumptions have to be right going in. If the stock cracks, is the bond floor really going to hold if things take a turn for the worse? It's not a typical REIT."

But the hedge trader reckoned that the deal was "tradable," although the trader acknowledged that the convertible was very risky.

"Nobody really knows how bad the credit can get and how quickly it can get," the trader said. "But I think it will do OK. I think it will trade up, and it's coming off a happy meal [stock buyback] so there's no stock risk."

The buyside analyst also saw the deal as slightly more interesting than the Franklin offering.

"It's got a big yield disadvantage, but I think it makes sense outright," the buysider said. "Despite the big yield disadvantage, you still have a big yield, and the stock definitely can move if you believe the story. It looked fair to marginally cheap to us...and the company management has a good track record."

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