New Pier 1 issue jumps; GrafTech drops, but Best Buy gains on guidance; XM Satellite lifts

By Rebecca Melvin

Princeton, N.J., Feb. 9 - Among big movers in the convertibles market on Thursday were the new issue of Pier 1 Imports Inc., which jumped out of the gate at 102.5 and moved higher in tandem with its shares, and GrafTech International Ltd., which tumbled nearly 10 points as its shares (NYSE: GTI) plunged 37% in response to lower guidance from the Delaware-based electrode maker and JP Morgan downgraded its equity rating, traders said.

Amkor Technology Inc. was also higher after reporting record sales and getting an equity upgrade from Deutsche Bank Securities to buy from hold. Meanwhile, Best Buy Cos. Inc. jumped in line with its shares on better guidance.

Other interesting names that surfaced in event-driven trading included: XM Satellite Radio Holdings Inc., which was better dollar neutral on the company's deal with Oprah Winfrey and an equity upgrade; and Sinclair Broadcast Group Inc., which was better bid after posting a fourth-quarter loss a day earlier.

Conexant Systems Inc. was eyed after its shares traded off earlier this week on news that it lost a large patent infringement case with Texas Instruments Inc. Conexant is appealing the decision.

The Conexant bonds were described as "a touch weaker." Its 4% convertibles due 2007 traded Thursday at 97.60, according to Trace.

Overall the market tone on Thursday was quieter than earlier in the week, traders said.

"The global tape is not that great; the yield curve is inverted and the world just isn't doing that well right now," a Connecticut-based sellside trader said, by way of explaining the general market's tenor.

There was also chatter about a significant number of people leaving New York hedge fund Highbridge Capital Inc., which spurred concerns about the potential impact on the convertibles market in terms of liquidity.

A Highbridge spokesperson confirmed that three people were departing the company and were believed to be leaving on Friday. "It was not a mass exodus," he said of the departures, which were said to be related to the company's reduced participation in convertibles.

A statement read: "Mark Vanacore, who has been with Highbridge since 1992 as global head of convertibles, will remain at Highbridge as a senior partner and continuing head of the firm's convertible, volatility and credit arbitrage business. As a percentage of the firm's overall capital, convertibles as a strategy of Highbridge has shrunk and therefore the group's headcount has been reduced accordingly."

Pier 1 "deal was a home run"

When released for secondary trading, the new Pier 1 Imports 6.375% convertibles jumped to 102.5. Later they rose to 104.5, and were seen at 104.5 bid, 104.75 offered mid session, before closing the day at 104.5, according to a syndicate source.

The company's shares (NYSE:PIR) closed up 31 cents, or 2.86%, at $11.16.

"PIR deal was a home run," a Connecticut-based sellsider said via email.

A Connecticut-based buysider added: "It was too attractively priced not to play." The buysider said that the bonds continued to rise in tandem with its stock, which was bouncing back Thursday after being sold off on Wednesday due to arbitrage players shorting the stock ahead of pricing to go long the bonds.

"There are a couple of things going on," the buysider said of the Pier 1 business. "They are doing poorly operationally, and recently a Danish retail magnate bought 9.9% of Pier 1's common stock. It's not known if the guy, Jakup Jacobsen, is going to make a play for the company or what the situation is. This guy is known for having taken a large stake of Linens 'n Things before it was announced that they were going to be taken private."

According to a regulatory filing earlier this week, Jakup a Dul Jacobsen and his companies bought about 8.6 million shares of Pier 1. Jacobsen said he bought the shares for investment purposes. He plans to continue to monitor the Fort Worth-based home furnishings retailer's financial performance via his investment vehicle, which may "modify its plans in the future."

Some said that difficulty with stock borrow was problematic, but others disagreed. About the only unanimous complaint about the deal from the market's perspective is that it wasn't larger. Pier 1 priced $150 million of 30-year convertibles at par with a 6.375% coupon for the first five years, and then 6.125%, with an initial conversion premium of 40%.

JP Morgan was the bookrunner for the deal.

Better guidance boosts Best Buy

The convertibles of Best Buy gained about six points on an outright basis after the Richfield, Minn.-based consumer electronics retailer raised its fourth-quarter and full-year earnings outlook, citing strength in sales of flat-panel TVs, portable audio products (including MP3 players), notebook computers and video games.

There was also a 20% rise in gift cards issued during the holiday season that boosted revenue in January, during which comparable store sales rose by the low double digits, the company said in a release.

Lifting per share guidance between 14 cents to 19 cents, the company now expects earnings from continuing operations in the fourth quarter, which ends Feb. 25, to be $1.25 to $1.30 a diluted share, up 23% from last year's fourth quarter on an adjusted basis.

"The stock is up big. The bonds have dividend risk. There is speculation that there will be at least one more dividend increase in view before the converts get called or put," a New York-based hedge fund trader said.

Best Buy's 2.25% convertibles due 2022 traded at 122.5, compared to 115.9 on Wednesday. Shares (NYSE: BBY) climbed $4.13, or 8.46%, to $52.96.

GrafTech lower on guidance

The GrafTech 1.625% convertibles due 2024 traded in the low 70s, with a Trace trade reported at 70.25, compared to prices in the upper 70 range on Wednesday.

"In terms of loss, this was the name du jour," a Connecticut-based convertibles sellside trader said. "There was some pain, especially in outright hands. It's dragging down the credit."

The graphite electrode products company issued a lengthy market update and outlook release late Wednesday.

In response, JP Morgan analyst Michael Gambardella downgraded GrafTech shares to "neutral" from "overweight," saying that the company had trouble getting good prices on its products particularly in Europe.

He said he believes this is the primary reason behind its underwhelming average graphite electrode prices in 2006. And he cut his earnings per share estimate to 47 cents for 2006, compared to 85 cents.

GrafTech shares slid $2.71, or 37%, to $4.60 on Thursday.

Amkor lifts on revenue

The convertibles of Amkor were up after the Chandler, Ariz.-based semiconductor company late Wednesday reported record fourth quarter sales of $643 million, up 42% from the fourth quarter of 2004. Shares of the company (Nasdaq: AMKR) surged $1.08, or 18.85%, to $6.84.

The 5% convertibles due 2007 traded at 97.125, compared to recent trades at the 90 to 91 level. And the 5.75% convertible due 2006 traded at 100, versus a recent indication at 98.

Amkor provides advanced semiconductor assembly and test services.

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