Blockbuster off as Apple gets into the act; Countrywide rally comes to an end; Tribune bonds tumble

By Paul Deckelman and Paul A. Harris

New York, Jan. 15 - Blockbuster Inc.'s bonds were seen down several points Tuesday, pushed lower, along with its shares, on news that the Dallas-based video rental chain and such established industry peers as Netflix Inc., will have some new competition in an already difficult market from Apple Inc.

Elsewhere, after three days of gains - the first explosive, the second solid and the third kind of so-so - the rally in Countrywide Financial Corp.'s bonds sparked by the news of its impending sale to Bank of America finally lost momentum and slowed to a halt.

The junk market saw several large downturns, from the recently privatized Tribune Co. and from Quebecor World Inc. - the latter's bonds falling despite the troubled printing concern's formal acceptance of a C$400 million financial bailout package crafted by its corporate parent and another investor, as bondholders worried about whether the company's senior lenders would go along with it. Quebecor said late Tuesday that it appeared as though they had not - but sought more time from its lenders. It also announced that it would not make a coupon payment on one series of notes which was due Tuesday.

Primary activity was restrained, although Harrah's Entertainment Inc. formally took to the road to market a portion of its upsized $5.275 billion offering of senior unsecured cash-pay notes, part of the Las Vegas-based gaming giant's leveraged buyout financing.

Market indicators ease a little

A trader saw the widely followed CDX junk bond index down 3/8 point at 92 5/8 bid, 93 1/8 offered. The KDP High Yield Daily Index lost 0.07 on the day to end at 75.97, while its yield widened by 2 basis points to 9.10%

In the broader market, declining issues led advancers by a little less than a three-to-two margin, while overall activity, as measured by dollar volume, was up about 15% from Monday's level.

A trader called Tuesday's session as "kind of a sideways day." He said that while the stock market "melted down" - the bellwether Dow Jones Industrial Average slid 277 points and, along with broader indexes, was down more than 2% on the day - the junk market did not really follow suit.

"It was very uneventful," he said, junk maintaining its "basic sideways" orientation, even as stocks got whacked. "I didn't see any [junk bond] sectors get crushed."

Sources on both the buy-side and the sell-side characterized the high yield market as "quiet" during the Tuesday session.

A money manager who focuses in part on high yield bonds said that junk was off somewhat against the backdrop of a big sell-off in the stock market.

A high yield syndicate official, meanwhile, said that the market was weaker in general on Tuesday, with below normal trading activity.

The basic tone was negative, the official added.

Blockbuster battered by Apple arrival

A trader saw Blockbuster's 9% notes due 2012 down 2 points at 80 bid, 81 offered, and blamed the bonds' fall - and that of its New York Stock Exchange-traded shares, which slid 54 cents, or 16.72%, to end at $2.69 - on the news that Apple has rolled out a movie download service at its iTunes store. Apple announced at its annual Macworld event that customers will be able to rent new-release movies for their computers, iPods or iPhones for 30 days for $3.99, and will be able to get older titles for a whole month for just $2.99. Apple's new service has the support of all of the major Hollywood studios, and the company expects to have at least 1,000 titles available by the end of next month.

Apple is the latest entrant into an already crowded movie-rental field that has seen one Blockbuster competitor, Number-Two brick-and-mortar video rental store chain operator Movie Gallery Inc., driven into bankruptcy last fall by tough industry conditions. Blockbuster's own bonds have slid over the past year from above par to their current levels. Blockbuster has so far avoided the same fate by closing many of its traditional physical stores and focusing more attention on its online movie rental operations, where it competes head-to-head with Netflix, which pioneered the online rental business. Blockbuster recently bought Movielink to improve its service in this area.

Both Blockbuster, with 4,000 movie and TV titles available for online rental, and Netflix, with 6,000, currently dwarf the nascent Apple service. But the rapid success of Apple's iPod and now its follow-up technology, iPhone was seen by some observers as scaring competitors' investors with the prospect that the Cupertino, Calif.-based computer technology company will also eventually come to dominate this field as well.

Tribune tripped up

Also in media-related names, Chicago-based newspaper, TV and sports entertainment conglomerate Tribune's 4 7/8% notes due 2010 were among the most heavily traded issues Tuesday - and were seen by a market source having plummeted nearly 7 points on the session to around the 63 level.

No fresh news was seen out on Tribune, which was acquired in an $8.2 billion buyout deal that closed late last year by billionaire real estate mogul Sam Zell. That deal will be paid for with the expected sale of some $2.1 billion of senior or senior subordinated junk notes, backed up by $2.1 billion of bridge financing via a syndicate led by Merrill Lynch, JPMorgan, Citigroup and Bank of America. The bulk of the buyout cost will be defrayed by a $10.133 billion bank credit facility.

Media industry watchers will be carefully scrutinizing what Tribune's owner - who has no prior experience running a media concern - will do to turn the underperforming company around.

Zell offered a clue or two Tuesday when he visited the suburban New York headquarters of Newsday, one of Tribune's larger and more important daily newspaper properties, along with its eponymous flagship paper in Chicago and the Los Angeles Times. Zell, in addressing the paper's employees, declared "I don't think this company has been particularly well run in the past," suggesting that part of the reason might lie with the fact that the former owners ran the company, which besides Newsday, the Times and the Tribune, owns four other major papers, 34 TV stations and the Chicago Cubs baseball team, among other properties - like a "media conglomerate" rather than "a conglomerate of media companies."

Zell told the Newsday workers that he would prefer a "bottom-up" corporate structure in which individual employees' ideas and innovation would be fostered for the long-term benefit of the whole company.

But while Zell impressed many of his new employees with an informal approach, telling them to call him "Sam" rather than "Mr. Zell" by saying "Mr. Zell was my father" others, were not so sure; unionized workers questioned the company's failure to grant them the same retirement benefit all other Tribune employees will enjoy under the new corporate structure and grilled Zell during a question-and-answer session about the termination of Tribune's contribution to their existing retirement accounts. Managing labor costs is seen as a challenge to owners of traditional publishing companies, with high labor costs widely thought to be one of the factors that has led to the demise of many well-known big-city papers over the past several decades.

Quebecor questions continue to undermine bonds

A trader saw Quebecor World's bonds continue to fall sharply amid concerns that the Montreal-based commercial printing company's banks may turn thumbs down on a proposed financial rescue plan put forward by its corporate parent, Quebecor Inc.

He quoted the unit's 6 1/8% notes due 2013 down 5 points on the session at 63 bid, 65 offered, but said that at one point the bonds had fallen even further, to the 61 bid area, before coming off those lows.

Another source meantime quoted those bonds at that 61 level, pegging them down nearly 7½ points on the session.

Its 4 7/8% notes coming due later this year meantime declined to 69 bid, 70 offered and its 8¾% notes due 2016 to 55 bid, 60 offered.

Quebecor's NYSE-traded shares - now trading at nearly-worthless penny-stock levels - meantime nosedived 28 cents, or 35.44%, to 51 cents per share on volume of 3 million, or six times the norm.

Late Monday, Quebecor said it accepted the $400 million rescue-financing proposal from Quebecor Inc. and Tricap Partners Ltd. Under the plan, the company would receive a C$200 million interim financing facility, which would then be replaced by March 31 with C$400 million in senior secured notes due 2012 to be issued to the financial backers.

The backers would also receive 75% equity in the company, which is further looking to convert its preferred shares into common stock.

But for that plan to move forward, Quebecor's banks must first agree to the terms of the plan. News reports Tuesday indicated that the bankers were balking at the plan, as it would lower their place within the capital structure.

Though Tuesday was the deadline for the company to find alternative financing, the company asked its banks to extend the date to Monday.

However, on Tuesday night, Quebecor World said in a statement that in the view of its lenders and sponsors of its securitization program, it has not, under the terms of waivers it was granted last month, met the condition of obtaining the required $125 million of new financing by Tuesday.

Quebecor declared that "the non-satisfaction of this condition of the Dec. 31, 2007 waiver does not automatically result in the termination of the banking syndicate's waiver or an acceleration of the maturity of indebtedness under the company's credit facilities or a cross-default under other financial instruments of Quebecor World. Any such termination, acceleration or default would require formal notification from a majority of the banking syndicate to Quebecor World."

The company further stated that while the non-satisfaction of this condition "also entitles the sponsors under the company's securitization program to terminate such program . . . any such termination would not, if effected, result in cross-defaults under any financial instrument of the company. Quebecor said that it had requested a one-week waiver of this condition from its banking syndicate and securitization sponsors to facilitate the rescue financing initiative currently underway, "but has declined to pay the significant waiver costs requested by its banking syndicate for this waiver, as the company believes it must preserve cash and this payment would not be in the best interests of all of the company's stakeholders."

Quebecor World said it renewed its request that the banking syndicate provide a suitable waiver and is awaiting the response.

Quebecor World further announced that "in light of the announced rescue initiative and its current circumstances," it would not make the $19.5 million payment of interest due today on its outstanding $400 million of 9¾% senior notes due 2015. The company said that the failure to make the interest payment does not result in an immediate default; it instead invoked the standard 30-day grace period.

Countrywide ride comes to an end

Elsewhere, Countrywide Financial's bonds were "generally unchanged to a little lower" after three straight days of advances, a trader said. He saw its 3¼% notes coming due this May unchanged at 96 bid, 97 offered, while its 6¼% notes due 2016 were off a point at 83 bid, 85 offered.

Another trader saw the bonds unchanged from Monday's levels.

At another desk, the Calabasas, Calif.-based mortgage lender's 5.8% notes due 2012 were seen ½ point higher at 91.5.

Countrywide's bonds had shot up dramatically on Thursday on the notion that it could be acquired in full by 16% owner Bank of America, and continued to rise, although more modestly, over the following two sessions following Friday's announcement of the $4 billion acquisition.

In that same sector, a trader saw Residential Capital LLC's 6½% notes due 2013 off 1½ points at 57 bid, 59 offered, while its 8 3/8% notes due 2015 were down 2 points at 58 bid.

Citi preferred

Although the high yield primary market failed to generate any news on Tuesday, the investment grade sphere got one high yield buy-sider's attention.

Citigroup, which recorded nearly $10 billion of fourth quarter 2007 losses on Tuesday, due mainly to write-downs in mortgage related securities, announced a $12.5 billion private placement of 7% convertible preferred shares.

Citi also launched a $2 billion public offering of perpetual non-cumulative convertible preferred stock after Tuesday's market close. The shares are talked at a 6½% to 6¾% dividend.

Citi also said Tuesday that it may do a non-convertible preferred later this year.

The buy-sider, who prior to the turn of the year warned Prospect News that the big financial institutions, in need of capital, will be bringing a formidable parade of preferred deals during 2008, reiterated that warning on Tuesday, and added that even though comparing a preferred to a junk bond is an "apples and oranges comparison," it all comes down to yield.

And double-A rated companies issuing paper that pays 6½% or 7% are bound to put pressure on high yield spreads, the investor added.

Prior to the turn of the year, sources told Prospect News that the junk accounts took interest late November's $6 billion preferred sale from Freddie Mac, with an 8 3/8% fixed-rated dividend for the first five years, as well as the early December $7 billion issue of Fannie Mae perpetual preferreds with a three-year fixed dividend of 8¼%.

The buy-sider, who had described Freddie Mac and Fannie May as "government sanctioned," suggested that investors considering Citigroup's preferreds might reason that the financial giant has an equivalent implied resilience because "it is simply too big to fail."

However this buy-sider, noting that MBIA's new 14% surplus notes due 2033, which priced last week at par in a $1 billion issue, were trading 96½ bid, 97½ offered late Tuesday, is steering clear of the financial sector for the present.

The backlog

Tuesday saw a roadshow start for an unspecified amount of Harrah's Entertainment senior unsecured guaranteed cash-pay notes.

Also on Tuesday Moody's Investors Services assigned its B3 rating to those notes, which are part of the upsized $5.275 billion of senior unsecured cash-pay notes backing the Harrah's LBO.

The upsizing of the cash-pay notes from $4.525 billion, in turn, is part of the overall $6.775 billion of proposed bond financing for the LBO, which was upsized on Monday from $6.025 billion.

The proposed bond financing also includes $1.5 billion of senior unsecured PIK toggle notes, the size of which was left unchanged in the Monday restructuring.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch are leading the bond portion of the financing.

Also on Monday Harrah's upsized its credit facility to $9.25 billion from $9 billion.

On Tuesday, concurrent with the launch of the cash-pay notes, Harrah's held a bank meeting to begin syndication on its $3 billion term loan B-2, the only portion of the three-part $7.25 billion term loan presently in the market.

The B-2 tranche was launched at a discount of 961/2, sources said. Price talk on the loan is Libor plus 300 basis points.

Bank of America and Deutsche Bank are the joint lead arrangers on the credit facility.

Commitments from lenders for the $3 billion B-2 tranche of the term loan are due on Jan. 29.

Meanwhile the roadshow for the cash-pay notes is set to wrap up on Jan. 25.

Stephanie N. Rotondo contributed to this report

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