Priceline climbs on debut; Lions Gate jumps on stock upgrade; Novell steady amid looming default

By Kenneth Lim

Boston, Sept. 22 - The weekend began early on Friday for the convertible bond market, with Priceline.com Inc.'s new paper rising on its debut amid a mostly quiet session.

Meanwhile, Lions Gate Entertainment Corp. climbed on the back of its stock, which was upgraded by Cowen and Co. in a research note on Friday.

Novell Inc.'s 0.5% convertible due 2024 was mostly unchanged, marked at 93.875 against a stock price of $6.24 as the stock continued to slip on delisting and default concerns. Novell stock (Nasdaq: NOVL) closed at $6.23, a loss of 0.95% or 6 cents.

"It was active yesterday [Thursday], a lot quieter today, but it's mostly unchanged," a convertible bond trader said. "I don't think the default was that big of a surprise for some people."

Waltham, Mass.-based Novell, which is delinquent in filing its financial reports, said late Wednesday that it had received a notice of default on the $600 million convertible series. It also received a delisting notice from Nasdaq. The developer of open-source software said it would challenge the default notice and appeal to Nasdaq to keep its listing status.

A convertible bond analyst noted that the possibility of a technical default had been supporting the prices of the convertible since Novell delayed its filings in August amid an internal probe into its stock option granting practices.

"I think that's why the bonds have been trading where they were for some time," the analyst said.

The Novell default notice, which was sent to Novell by Wells Fargo Bank, arrived the same week that the New York State Supreme Court found that BearingPoint Inc. breached the indenture of its convertibles when it failed to file its financial reports on time. That ruling could place pressure on companies, such as Novell, which have similar disputes with convertible holders.

"The courts are saying that the companies have to meet their obligations under their indentures...some of those companies have stronger language in their indentures than BearingPoint," a sellsider said.

Millipore Corp.'s 3.75% convertible due 2011 also traded at 99.75 against a stock price of $21, down by about three-quarters of a point outright, as the stock slid on a broad-based retreat in the equity markets. Shares of Billerica, Mass.-based Millipore (NYSE: MIL) slid 4.11% or $2.61 to close at $60.90 on Friday.

"We saw some activity there in Millipore, although nothing really moved on a meaningful basis," the sellsider said. "There were many things trading in line, if at all."

Millipore supplies laboratory equipment to biopharmaceutical companies.

But the convertible bond market in general had a quiet session on Friday, with most of the action taking place early in the day.

"There's not a hell of a lot going on," a sellside convertible bond trader said. "There's nobody around."

Priceline up on debut

Priceline.com's newly priced five- and seven-year convertibles were up over a point outright on their debut Friday, with observers citing a strong stock and market hunger for non-real estate investment trust paper for the gains.

The 0.5% convertible due 2011 was 101.5 bid, 101.875 offered against a stock price of $33.65 on Friday, while the 0.75% convertible due 2013 was 101.25 bid, 101.75 offered against a stock price of $34.40. Priceline stock (Nasdaq: PCLN) gained 5.02%, or $1.69, to close at $35.34.

"There were a lot of quotes," a sellside convertible bond trader said.

The $300 million two-tranche offering of convertible senior notes priced within talk on Thursday after the market closed, with the five-year series at a coupon of 0.5% and the seven-year series at a coupon of 0.75%. The initial conversion premium for both tranches was set at 20%.

The $150 million five-year series was talked at a coupon of 0.25% to 0.75% with an initial conversion premium of 17.5% to 22.5%. The equally sized series of seven-year notes was talked at a coupon of 0.5% to 1% with the same initial conversion premium range.

Each tranche has an over-allotment option for a further $22.5 million.

Goldman Sachs was the bookrunner of the Rule 144A offering.

Norwalk, Conn.-based Priceline.com, an online travel company, plans to use the proceeds to buy back up to $150 million of its common stock and to repay existing convertible debt that will become due in 2008. The company will also tender for all its outstanding convertible debt due 2010 and 2025 in a part-cash, part-exchange offer, although it did not specify in what proportions. Priceline will also enter into convertible note hedge transactions and fund general corporate purposes with the proceeds of the deal.

A sellside convertible bond analyst said both convertible series modeled about a quarter-point to just over a half-point above par, meaning that they were just about fairly valued when priced. The convertibles' gains on Friday came partly on the back of the stock's rally, the analyst said.

"The stock is up; that makes sense," the analyst said.

Priceline on Thursday raised its third-quarter outlook, saying it now expects earnings of 33 cents to 37 cents per share in that period, up from the previous forecast of 29 cents to 34 cents per share.

Another convertible bond analyst said the convertibles looked "expensive."

"I thought the transaction was an increase in leverage...and people were paying high 30s vol for this name, when it's a mid, if not low, 30s vol," the analyst said.

The analyst reckoned that the market may have been more willing than usual to pay up for a convertible that was not issued by a REIT after a number of REIT deals the past two months.

"People wanted non-REIT paper," the analyst said. "The lack of that type of paper, besides REITs they've been few and far between - it makes people willing to stretch a little more."

Lions Gate gains on upgrade

Lions Gate's 4.875% convertible due 2010 gained about 20 points outright on Friday in line with the stock after the equity received an upgrade.

The lightly traded convertible was marked at 193.625 bid, 194.125 offered against a stock price of $10.40 on Friday. Lions Gate stock (NYSE: LGF) closed at $10.44, a 3.78% or 38-cent improvement.

"The stock has done very, very well," a sellside convertible bond trader said.

Cowen and Co. equity analyst Lowell Singer on Friday raised his recommendation on the stock to outperform from neutral, citing the possibility of the company beating its revenue outlook.

Singer noted that the Santa Monica, Calif.-based film and television show producer and distributor has already made $90 million in box office sales from films in the current fiscal year. With its strong pipeline of films, Lions Gate could generate domestic box office revenue of $334 million for the year ending March 2007, Singer said. Lions Gate has guided for U.S. box office revenue of $250 million to $300 million for fiscal 2007.

A convertible bond analyst was more cautious about investing based on Lions Gate's credit profile.

"It's a big takeover name," the analyst said. "I also think I'm not sold on the credit. I'm not sure in their ability to forecast cashflow...it's good for volatility, but not necessarily good for the credit."

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