New Jakks quiet; existing Jakks trades lower; Ares gets boost from research; AMD gains

By Rebecca Melvin

New York, July 19 - Jakks Pacific Inc.'s newly priced 4.25% convertibles were unusually quiet and not heard in trade in the secondary market Friday after the Malibu, Calif.-based toy and leisure products company priced $100 million of the notes at the cheap end of talk.

Jakks' existing 4.5% convertibles traded lower, at 97.75 bid, 98.25 offered, which was the lower end of its previous range. The issue trades on an outright basis.

The week's other two new deals reversed fortunes on Friday. Ares Capital Corp.'s $250 million of 4.375% convertibles got a little boost from research on the name and following initial weakness in the issue immediately after pricing.

Barclays published a research note on the Ares Capital convertibles Thursday recommending the longest-dated, or newest, issue for its valuation.

But Forest City Enterprises Inc.'s $250 million of 3.625% convertibles was down 0.25 point to 0.375 point on a hedged basis from issue after initial strength in the aftermarket for the seven-year convertibles.

Forest City was seen at 101.5 bid, 102.125 offered versus an underlying share price of $18.46 on Friday, compared to 100.5 versus a share price of $17.93 at issue.

"That's in about 0.25 point since the first day trading on a 70% delta," a New York-based trader said.

Elsewhere Advanced Micro Devices Inc.'s 6% convertibles due 2015 were seen trading about flat on the day, but up for the week by about 0.75 point, disregarding a 13% slide in the underlying shares on a second-quarter loss on lower revenue.

Microsoft Corp.'s convertibles were also in trade after the software giant posted disappointing earnings that sent the underlying shares down 11%.

The technology sector led the Dow Jones industrial average and Nasdaq stock index lower on Friday, but the S&P 500 stock index was flat.

The Detroit bankruptcy filing was a factor in the broader markets, sources said.

"It's not spilling over," an analyst said.

Existing Jakks lower

Jakks' 4.25% convertibles due 2018 were not heard in trade on Friday after the $100 million issue priced at the cheap end of talked terms.

But Jakks shares extended losses, ending down 33 cents, or 4.7%, to $6.67, extending a 39% swoon on Thursday.

And Jakks' existing 4.5% convertibles due 2014, a portion of which will be redeemed with proceeds of the new deal, traded lower at 97.75 bid, 98.25 offered.

The older issue also printed at par, according to Trace data.

"It's almost like the company bought some back with the new deal at par and the paper was quoted 97 to 98 on the follow through. So if you bought into the new deal and got to put back your old bonds, it looks like you did well, but I think it's still better to own the shorter paper," a New York-based trader said.

"With that disastrous earnings report and with the company burning that much cash, you don't want a five-year maturity," the trader said.

Furthermore, "if you had the old ones set up and they were 102 and set up on a 45% delta, you probably came out equal or better off on a dollar-neutral basis post all this new deal activity," the trader said.

"Now the company has the funds to pay back what's left of the short-dated; I'd rather own the old," he said.

Jakks priced the new deal at a slightly lower coupon and an initial conversion premium of 25%. The Rule 144A deal priced at the cheap end of talk, which was for a 3.75% to 4.25% coupon and a 25% to 30% premium, according to a syndicate source.

There is a $15 million greenshoe.

The deal was sold via bookrunner BofA Merrill Lynch.

The bonds are non-callable for life with no puts. They have net share settlement and contingent conversion if shares exceed 130% of the conversion price. There is also standard takeover and dividend protection.

Proceeds are earmarked to repurchase a portion of Jakks' 4.5% convertibles due 2014. They will be used for general corporate purposes if Jakks is unable to repurchase the existing notes on satisfactory terms.

Ares Capital gets a boost

Ares Capital's 4.375% convertibles due 2019 were seen at 98.5 bid, 98.875 offered on Friday, which was 0.5 point to 0.875 point better from issue, a New York-based analyst said.

"The stock has been pretty stable and the convert added a little," the analyst said. The new deal priced at a discount to par of 98.5.

Ares has five convertibles outstanding for a total of $1.5 billion in face value. Barclays' note supported the valuation of the longer end convertibles even though when the new convertible came all four of the other issues cheapened a little. But the newest bond is still cheaper and has the lowest premium. Its premium was most recently 13.2%, compared to 13.3% for the 4.875% convertible, and all the others, which have premiums of between 16% and 17.5%.

"Since the beginning of the rate sell-off, the converts have cheapened as a result of wider Treasuries, higher spreads, lower equity and most recently the issuance of a cheaper convert. After the sell-off, both the Treasury curve and the credit curve have steepened," according to the Barclays report.

AMD edging up

AMD's 6% convertibles due 2015 traded at 103 and 103.125 Friday and then were offered at 103.5. That was called flat on the day but up from 102.375 a week ago.

AMD shares were down 61 cents, or 13% at $4.03.

"The stock has been getting smacked around and they had numbers out last night, but the paper matures inside of two years," a New York-based trader said.

The short-term, out-of-the-money AMD issue has "climbed up, and trades in line with its bond floor, assuming a credit spread of 375 basis points," a New York-based analyst said.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

Ares Capital Corp. Nasdaq: ARCC

Forest City Enterprises Inc. NYSE: FCE-A, FCE-B

Jakks Pacific Inc. Nasdaq: JAKK

Microsoft Corp. Nasdaq: MSFT

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