Movie Gallery bonds plunge 12 points; Fedders falters; Collins & Aikman seller seen

By Ronda Fears

Memphis, Aug. 10 - Distressed paper largely took an early cue from Movie Gallery, Inc. on Thursday, as the retail movie rental chain reported it has engaged Merrill Lynch & Co. to advise on ways to improve its capital structure as well as Alvarez & Marsal, a leading turnaround management, restructuring and corporate advisory firm.

"News is driving trades," however, as one trader remarked.

In the afternoon, he said, "the stock market coming back helped. The airlines were the big attention point in the morning with the stocks off 5% to 10%. But it has all come back up.

"I think people dropped their bids but the offering really didn't come down. People just widened out their markets a little with regard to what was going on."

For the autos, Ford Motor Co. and General Motors Corp. were traveling down in the morning after being higher by around half a point on Wednesday. "They gave that all back and more," the trader said.

GM's bonds due 2033 were pegged at 82.25, down a half point.

Movie Gallery a noir genre

Movie Gallery, however, was the "disaster du jour" with the scene playing out as a massive sell-off that sent the 11% bonds due 2012 plunging by about 12 points to the 69 area as the stock lost more than half its value.

In distressed bank debt circles, the term loan B bounced around throughout the session, with some quoting it as low as 95½ bid, 96½ offered by the end of the day, while others said that levels closed more around the 96¼ bid, 96¾ offered context. Either way, the paper was definitely down from Wednesday's closing levels of 97 1/8 bid, 97 5/8 offered, traders remarked.

"Ouch!" was a singular line from one bond trader that summed up the day for Movie Gallery holders.

Another trader had an equally appropriate summation with "ugly."

A buyside market source said there "probably was not a hedge wide enough to even put a band-aid on the gushing losses in the bonds."

Movie Gallery bonds exited the session at 68.50 bid, 69.50 offered, down 12 points on the day, while the stock (Nasdaq: MOVI) plunged $3.50, or 54.1%, to $2.97 with a whopping 21 million shares traded versus the norm of 2.6 million shares.

The company posted fiscal second-quarter revenues of $601.3 million, up from $504.7 million a year before, showing the effects of its acquisition of Hollywood Entertainment Corp. in April 2005, but reported a net loss of $14.9 million, or $0.47 per diluted share. Adjusted EBITDA was $57.6 million compared with a pro forma adjusted EBITDA of $63.5 million in the 2005 quarter.

Turnaround strategy uphill

While Movie Gallery's numbers were not as good as hoped, hiring a restructuring specialist sparked concern about debt covenants even though the company remarked about that in its earnings release, perhaps in anticipation that it would surface.

As of July 2, Movie Gallery said it had cash and cash equivalents of $21.2 million and available borrowings under its revolving credit facility of $39.3 million and as of Wednesday had no borrowings on the revolver apart from open letter-of-credit commitments.

The company said that it believes resources on hand are adequate to meet its foreseeable liquidity requirements, including remaining in compliance with the financial covenants in its credit facility and debt service for the remainder of fiscal 2006.

"Movie Gallery is aggressively pursuing opportunities to increase revenues and further improve operating efficiencies," said chief executive Joe Malugen in the earnings report, before saying that the company has hired Merrill and Alvarez & Marsal.

Still, long term one Movie Gallery player said it and Blockbuster will be strapped to compete when video on demand gets full market penetration.

"I agree with the commonly held opinion that VOD [video on demand], when it becomes functional for the masses, will effectively doom video rental in the forms we now have. I don't see Blockbuster or Movie Gallery being able to be a player in the implementation of VOD for the simple reason that they have no money," said the New York-based fixed-income fund manager.

"Blockbuster is mired in a huge debt burden at the same time their margins are shrinking. Blockbuster is viewed (and rightfully so) as being an old company which is getting killed by the innovations in on-line rental.

"Movie Gallery got sunk with the Hollywood acquisition. When VOD really arrives, it will be the likes of a cash-rich, tech-savvy Netflix that will be at the forefront of that parade."

Blockbuster, Inc.'s 9% bonds due 2012 were quoted closing at 92.50 bid, 93.50 offered, down 0.75 point.

Fedders bonds falter

Appliance maker Fedders Corp. also took fell off Thursday following its second-quarter earnings release a couple of days earlier.

A trader saw the Fedders bonds trading at 69, down "5-ish" points.

Another market source said hedge funds were positioning in anticipation of more bad news from Fedders, noting the stock also took a big dive in the regular session and an even bigger plunge after hours. Fedders shares (NYSE: FJC) dropped a dime on the day, or 7.81%, to close at $1.18 and then in after-hours trade were seen lower by another 11 cents, or 9.32%, at $1.07.

"If I didn't laugh, I'd cry," the trader said. "You really can't explain this by the earnings. That was two days ago. I will wait to see how next month or so plays out, but I have a feeling it's not going to be pretty."

Fedders reported on Tuesday a second-quarter net loss of $10 million, or 32 cents per diluted share, compared with a net loss of $2.5 million, or 8 cents per diluted share, in the 2005 quarter. Net sales were $95.6 million, down 22.1% from $122.7 million a year prior.

Collins & Aikman sold off

Collins & Aikman Corp.'s bank debt gave up another few points on Thursday as a large seller emerged and private whispers on the sale of the company continue to work their way around the market, according to a trader.

The pro rata bank debt closed out the day quoted at 58 bid, 62 offered, down from Wednesday's closing levels of 63 bid, 65 offered, the trader said.

"A large seller sold between $100 to $200 million, putting some pressure on it, but I think it all cleared from what I understand," the trader said.

When asked what could be responsible for the paper's disastrous slide over the past few weeks, the trader said that there are "private rumblings on bidders or the lack thereof for the company. Also, there's just a lack of positive news."

Collins & Aikman is a Troy, Mich.-based automotive interior components maker.

Sara Rosenberg and Paul Harris contributed to this article.

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