AMR, UAL extend gains; Take-Two holds up on hedge, stock sinks; King Pharma, Lions Gate up

By Rebecca Melvin

New York, Dec. 4 - A pair of airline convertibles lifted higher in trade on Friday, extending recent gains, as shares rose, boosted by traffic numbers and a strong jobs report.

AMR Corp. moved up several points to par and UAL Corp. edged up another point to 125 after jumping 14 points on Wednesday. UAL started the week at 108.

Take-Two Interactive Software Inc. fell in active trade - but held in on a hedged basis - as its underlying shares plunged 30%. Late Thursday, the video game publisher announced lowered revenue and earnings guidance for its completed fiscal fourth quarter and predicted losses for its current quarter and full year 2010. The game maker was also downgraded by a handful of research firms on Friday.

International Game Technology, a gaming-equipment company, was weaker with shares on Friday. The 3.25% convertibles due 2014 of the Reno, Nev.-based maker of gaming machines and systems traded at 119 versus a share price of $17.90, compared to 123 versus a share price of $19.00 on Wednesday.

King Pharmaceuticals Inc. has been improving seemingly on a daily basis, however, according to a New York-based sellside trader. Lions Gate Entertainment Corp. has also been better. One source cited abating worries about the company having to lever up to buy MGM's film library.

Overall, the convertibles market was active for a Friday, a New York-based sellside trader said.

"A lot of people on the hedge side are set up heavier than models would suggest. They are set up for a pull back in stock prices, because stock prices have run up, and they look kind of overbought and ready to roll over - but that doesn't ever seem to happen," the sellsider said.

That's why November numbers didn't look as good as they have been, the sellsider said. They might lose a few basis points on the upside, but they are protected on the downside going into the end of the year. That may all change come Jan. 1 though, he said.

For the time being, the secondary market is seeing steady to mostly improved valuations. There were rumors in the past week that European convertible investors were putting money to work in the U.S. market.

The Friday jobs report sparked optimism about economic recovery and initially boosted stocks. The latest nonfarm payrolls figure showed a much smaller-than-expected job loss tally of 11,000 for November. A drop of 150,000 had been expected.

In addition, previous months were revised to reflect fewer job losses. In turn, unemployment decreased to 10.0% from the previous reading of 10.2%.

For reasons that weren't altogether clear, stocks turned lower during the session. One sellsider suggested the turn down was due to the stronger dollar. But stocks ended the session mildy higher.

On the primary front, no price talk was yet available on Sino-Forest Corp., which plans to price $400 million of seven-year convertible bonds Dec. 10. Talk should be available in the Dec. 7 week, a syndicate source said Friday.

AMR, UAL look to have expanded

AMR's 6.25% convertibles due 2014 traded just over par on Friday, up from 96.75 on Thursday.

Shares of the Fort Worth-based airline closed up 50 cents, or 7.3%, to $7.37 on Friday.

UAL's new 6% convertible paper, priced Oct. 1, traded at 125 versus a share price of $9.25, which compared to 108 versus a share price of $7.80 on Monday.

"Airlines - the higher delta names - got a little better," a sellsider said. "With UAUA above par, it jumps around with the common. It's a high delta and low premium. All these came around the same time with depressed stock prices and they are very equity sensitive."

Late Thursday, UAL said consolidated traffic increased 1.8% in November to 8.63 billion revenue passenger miles, equal to one passenger flown one mile. Seat capacity declined 2.7% to 10.75 billion available seat miles, helping to lift its load factor to 80.2% from 76.7%.

AMR's American Airlines reported November traffic dipped 0.5% while capacity fell 4.2%. That helped to raise the carrier's load factor to 79.6% from 76.6%.

"Traffic numbers were relatively good, and capital spending and return on investment is looking up," a sellsider said.

Take-Two holds in on a hedged basis

Take-Two's 4.375% convertibles due 2014 traded at par versus a share price of $7.75 on Friday. That compared to a level of 130 a week ago, a New York-based sellside desk analyst said.

Shares of the New York-based maker of Xbox and other video games closed down $3.18, or 29%, at $7.74 on Friday.

"They came down on a 75 delta, and that's where they were. They probably held up all right," a sellsider said, citing another example that convertibles players are set up pretty heavy.

One equity analyst said the company has some positive catalysts in the future, but it has to get through severely reduced guidance for the rest of the year.

The company said it anticipates that its results for the fourth quarter and fiscal year 2009 will be below prior guidance due to several factors, not the least of which is the performance of its Major League Baseball titles in the fourth quarter, which reduced earnings by approximately $0.09 per share, along with an impairment of capitalized software based on sales estimates for its MLB titles in fiscal 2010, representing approximately $0.05 per share.

The company also incurred inventory write downs in its distribution business primarily related to prior generation software, representing approximately $0.07 per share, and realized lower-than-expected initial performance of several of its key holiday releases.

Additionally, on a GAAP basis, Take-Two expects to record non-cash impairment charges of up to approximately $15 million on its distribution segment (equivalent to $0.19 per share in the fourth quarter and $0.20 per share for the full fiscal year 2009).

In addition Take-Two expects to report a non-GAAP net loss per share for fiscal 2010 in the range of $0.40 to $0.60 on $1.0 billion to $1.2 billion in revenue. Take-Two's preliminary forecast for the fiscal first quarter is for a non-GAAP net loss per share in the range of $0.40 to $0.50 on $210 million to $260 million in revenue.

It trimmed fourth-quarter revenue guidance to $325 million to $350 million from $350 million to $375 million and for full-year revenue to $950 million to $975 million. The company reports earnings on Dec. 14.

Mentioned in this article:

AMR Corp. NYSE: AMR

International Game Technology NYSE: IGT

King Pharmaceuticals Inc. NYSE: KG

Lions Gate Entertainment Corp. NYSE: LGF

Take-Two Interactive Software Inc. Nasdaq: TTWO

UAL Corp. Nasdaq: UAUA

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