You wouldn't have had this issue with COALESCE(), which is ANSI SQL standard anyway.  Here's an example:

DECLARE @C CHAR(2)

SELECT COALESCE(@c, 'HELLO')

SELECT ISNULL(@c, 'HELLO')

The COALESCE() version returns what you expect.  The ISNULL() version returns 'HE'.  One more reason to use ANSI SQL-92 standard functionality in your code when presented with the choice.

See http://www.sqlservercentral.com/columnists/mcoles/fourrulesfornulls.asp, Rule #4.