John Maneely breaks; Movie Gallery wanes on financial reporting deficiencies, more covenant warnings

By Sara Rosenberg

New York, March 24 - John Maneely Co. freed for trading during market hours Friday, with the term loan seen quoted in the high-101 context.

Also in trading, Movie Gallery Inc.'s term loan was softer again on Friday as the company revealed that it identified four material weaknesses in its internal controls and warned that it could be facing financial covenant compliance issues in the future.

John Maneely allocated its credit facility on Friday, with levels on the term loan seen at 101½ bid, 101 7/8 offered by the end of its first day of trading, according to traders.

The $290 million seven-year term loan (B2/B) is priced with an interest rate of Libor plus 300 basis points. During syndication, pricing on the tranche was reverse flexed from Libor plus 350 basis points as the deal was so heavily oversubscribed that they had to shut the book down a few days ahead of schedule.

John Maneely's $490 million credit facility also contains a five-year asset-based revolver (Ba3/BB-) with an interest rate of Libor plus 150 basis points.

Goldman Sachs and Citigroup are the lead banks on the deal, with Goldman on the left.

Proceeds will be used to help fund The Carlyle Group's acquisition of Collingswood, N.J.-based John Maneely, parent company of Wheatland Tube Co., a manufacturer of steel pipe and tubular products, and Seminole Tubular Products Co., a manufacturer of plumbing and electrical fittings.

Movie Gallery heads lower

Move Gallery's term loan softened in trading on Friday as the company revealed that it has found material weaknesses in its internal controls over financial reporting and anticipates facing more financial covenants compliance problems, according to a trader.

The Dothan, Ala.-based video rental company's term loan closed the session quoted at 89¾ bid, 90¾ offered, down a quarter of a point from Thursday's closing levels of 90 bid, 91 offered, the trader said.

On Friday, the company announced in a 10-K filed with the Securities and Exchange Commission that four material weaknesses in its internal controls have been identified - ineffective management review of account analyses and reconciliations, ineffective communication of accounting policy for capitalizing costs and lack of effective review process, inaccurate or lack of timely updating of accounting inputs for key estimates, and assumptions and ineffective procurement and receiving processes.

As a result of these reporting deficiencies, the company warned that investor confidence in the reliability of its financial statements could diminish, which ultimately could negatively impact market prices for its securities.

In addition, Movie Gallery also revealed in its 10-K that it may not be able to comply with some financial covenants for the first quarter of 2007 without further amendments to its credit facility.

The facility was just amended on March 15 to relax certain financial covenants, including the leverage ratio, fixed charge coverage ratio and interest coverage ratio; however, these covenants get stricter once first-quarter 2007 rolls around.

Beginning with the first quarter of 2007, the leverage ratio drops to 2.25 from the 6.50 requirement in fourth-quarter 2006, the fixed charge coverage ratio goes up to 1.10 from the 1.00 requirement in fourth-quarter 2006 and the interest coverage ratio moves to 3.00 from the 1.45 requirement in fourth-quarter 2006.

Movie Gallery went on to say that it is exploring strategic alternatives to avoid future non-compliance, such as operational improvements, raising additional equity, divesting non-core assets and sale/leaseback transactions.

Friday was not the first day this past week that the term loan experienced some pressure in trading. On March 20, the paper dropped to 92 bid, 93 offered from 93 bid, 94 offered on no particular news. Then on Tuesday, the loan dropped to 91 bid, 92 offered as uninspiring preliminary 2006 financials surfaced. On Wednesday levels pretty much stayed status quo, but once fourth-quarter and full-year financials were announced on Thursday, the bank debt receded to the 90 bid, 91 offered context.

For the fourth quarter of 2005, the company reported total revenues of $676.4 million, compared with $208.4 million last year, and a net loss of $546.5 million, or $17.25 per share, compared with a gain of $11.4 million last year, or $0.36 per diluted share.

For fiscal 2005, Movie Gallery's revenues totaled $2 billion, compared with $791 million for 2004, and net loss totaled $552.7 million, or $17.53 per share, compared with a gain of $49.5 million, or $1.52 per diluted share, last year.

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