Jakks oversubscribed despite stock drop; Merrimack 'holds in'; James River quiet, stock up

By Rebecca Melvin

New York, July 18 - Despite a slide in the underlying shares of Jakks Pacific Inc., the books on the company's $100 million offering of five-year convertibles were successfully closed Thursday afternoon and final terms were expected to be fixed within the range of initial talk after the market close, a syndicate source.

Jakks shares slumped 39% to $6.99 on Thursday.

The Jakks convertible deal was seen as cheap at the midpoint of talked terms, using a credit spread of 800 basis points over Libor and 30% vol., a Connecticut-based trader said.

Jakks' existing 4.5% convertibles due 2014, a portion of which will be redeemed with proceeds of the new deal, were not active, sources said. One source quoted an indicated market in the older issue at 97 bid, 100 offered.

Jakks launched the new convertible in tandem with the company's preannouncement late Wednesday that its quarterly results didn't meet targets and that it is cutting its full-year outlook, reducing workers and suspending its dividend.

Elsewhere, Merrimack Pharmaceuticals Inc.'s 4.5% convertibles due 2020, which priced a week ago, were said to be steady at strong pricing although shares remain low after plunging 28% on the heels of the deal. Shares of the developmental-stage biopharmaceutical company plummeted to $5.03 on July 11, and they closed Thursday at $4.95.

James River Coal Co.'s convertibles were quiet despite a 15% surge in the underlying shares of the Richmond, Va.-based coal company during the session. The James River shares closed 12.5% higher on the day, and shares in the overall coal sector were up, but not by as much as James River, a trader noted, saying it wasn't clear what was behind James River's share surge.

Intel Corp.'s convertible bonds were mixed with shares of the Santa Clara, Calif.-based chip maker down 3.8%. Intel's 3.25% convertibles due 2039 were active around 123.5 bid, 123.75 offered, which was up slightly, while its 2.95% convertibles due 2035 were lower by about 1.5 points at 107.6.

Navistar International Corp.'s 3% convertibles due 2014 were up 0.375 point to back over par at 100.25, with its underlying shares up 1.8%.

Meanwhile, Cemex SAB de CV's convertible bonds were said to be moving in tandem with shares in recent action. On Thursday, the shares were up 1%.

"Cemex has just been dollar nuking around," a New York-based trader said.

Convertibles have more or less stalled with the summer doldrums. "It's already an illiquid market, and the summer makes it even worse," a trader said.

Stocks added again on Thursday after positive economic data and decent quarterly results The Dow Jones industrial average rose 78.02 points, or 0.5% to 15,548.54; the S&P 500 stock index added 8.46 points, or 0.5%, to 1,689.37, while the Nasdaq composite index added just 1.28 points to 3,611.28. The Dow and S&P 500 hit fresh intraday highs.

In economic data, the initial claims for jobless benefits fell 24,000 to a seasonally adjusted 334,000 in the latest week, which was more than expected.

Jakks shares slump

Shares of Jakks Pacific, the Malibu, Calif.-based toy company, skidded 39% on Thursday after the company slashed its outlook, suspended its quarterly dividend and said it was going to be reducing staff.

But its planned convertible bond offering was getting off the ground at terms that were unchanged from initial talk.

"The convertible deal was oversubscribed and on track to price," a syndicate source said Thursday afternoon.

Jakks shares plunged $4.48 to $6.99. Talk on the deal was for a 3.75% to 4.25% coupon and 25% to 30% initial conversion premium.

"Clearly for the equity investors, it was not positive, but for convert investors it depends of their view of the stock price action and whether they think it was because of the deal or because of the news," the syndicate source said.

In some cases a company might want to pull the deal on a stock plunge because it doesn't want to price off the low share price. And as for investors, a share price plunge of that size might make them nervous.

One East Coast-based buysider said, "The company has serious issues; I wouldn't touch it. But if you are in the outstanding bonds, you may need to buy the new ones to make sure the company has funding."

A portion of proceeds of the new deal will be used to redeem the $100 million of 4.5% convertibles, which Jakks priced in 2009.

The ability to borrow the stock has been tough in the name, a trader said, quoting the older issue wide at 97 bid, 100 offered.

Jakks designs and markets toys and consumer products, including action figures, dolls, dress up and role play toys, and Halloween costumes. It also is a licensee of trademarks including Disney, Warner Bros. Nickelodeon, Star Wars and Hello Kitty.

In addition to citing "substantially" lower orders from several U.S. and European retailers, the company said top line weakness resulted from a pattern of children's playing preferences toward smart devices and away from toys.

Furthermore, various products, such as those related to Monsuno, a Japanese-style animated television show, performed poorly.

Jakks launched an offering of $100 million of five-year convertibles in a Rule 144A offering that has a $15 million greenshoe and was being sold by bookrunner BofA Merrill Lynch.

The planned Jakks bonds are non-callable for life.

Merrimack 'holds in'

Merrimack Pharmaceuticals' 4.5% convertibles due 2020 were seen at 104.5 bid, 105 offered with shares at $4.97 on Thursday.

"That issue is holding in. It's holding its premium and is better to buy," a New York-based trader said.

Better to buy generally means the bid is stronger and the offer possibly nebulous.

The stock has stuck right around where it had fallen to when the deal priced July 11.

"The numbers are cheap, even if the credit is speculative; from a premium standpoint, this is attractive," the trader said.

The convertible deal was upsized to $125 million of seven-year convertible senior notes from $75 million, while a concurrent stock offering of 5 million shares was downsized to $25 million from $50 million.

The bonds priced at the midpoint of talked terms via joint bookrunners J.P. Morgan Securities LLC and BofA Merrill Lynch, with Cowen & Co. LLC acting as co-manager.

"These have done better and feel better to buy," the trader said.

Mentioned in this article:

Cemex SAB de CV NYSE: CX

Intel Corp. Nasdaq: INTC

Jakks Pacific Inc. Nasdaq: JAKK

James River Coal Co. Nasdaq: JRCC

Navistar International Corp. NYSE: NAV

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

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