Movie Gallery bonds, bank debt in retreat on downgrade; Dana also lower

By Paul Deckelman and Sara Rosenberg

New York, Feb. 28 - Movie Gallery Inc.'s bonds were seen down about three points Tuesday while its term loan dropped off by about a point or so as the company's debt instruments and corporate credit rating were downgraded by Standard & Poor's. Bank loan traders also cited the accidental publishing of false leverage numbers, saying this created some panic among investors.

In the automotive sphere, Dana Corp.'s bonds backed off the solid gains they had notched on Monday, towed lower Tuesday by a combination of factors, including profit-taking on the earlier gains, a negative Wall Street Journal article and a credit downgrade from Fitch Ratings.

Movie Gallery's term loan closed out Tuesday's session quoted at 92.25 bid, 93 offered by one trader, and a little wider at 92 bid, 93 offered by a second trader. By comparison, on Monday the paper had been up around 93 bid, 94 offered, although with no trading taking place it was hard to tell if those levels were real.

Prior to Monday, the bank debt was quoted at 93.75 bid, 94.5 offered.

Over on the bond side of the fence, the Dothan, Ala.-based video rental chain operator's 11% notes due 2012 - which had pushed as high as the 69 bid, 70 offered level on Monday from prior levels in the mid-60s - gave it all back, retreating to 65 bid, 66 offered. That put the bonds down three or four points on the day, depending on whom you talked to.

On Tuesday, S&P lowered its corporate credit and bank loan ratings on Movie Gallery to CCC+ from B- and its unsecured note rating to CCC- from CCC.

Furthermore, the ratings agency lowered its bank loan recovery rating to 5 from 3, indicating that lenders can expect negligible recovery of principal (0%-25%) in the event of a payment default or bankruptcy.

S&P said that the downgrade reflects growing concern that the company's operating results will remain pressured in 2006 by weak industry fundamentals.

And, the company's need to amend its credit facility for the second time in less than one year is indicative of pressures on its current and near-term performance, S&P added.

"After that downgrade, the bonds fell," one of the junk traders said. "The only thing that's keeping the prices [on the 11% notes] propped up as high as they are reports that they may have someone looking at them [as a potential buyer], although I very much doubt that anyone will want to buy them. Otherwise, those bonds would fall back down to the 50s."

The bonds recently were as low as the 57-58 region, having fallen there over several sessions from prior levels in the low-to-mid-70s on news that Movie Gallery - whose revenues were already under competitive pressure - may soon see another competitor in the marketplace. The Walt Disney Co. announced about two weeks ago that it would ally with several other partners for a movies-on-demand home delivery operation called MovieBeam.

Back in the bank debt market, traders said that the release of a report that mistakenly put Movie Gallery's leverage at almost twice its actual level, was creating some strain on the debt and although a correction was later published, some damage had already been done.

"S&P put out a piece talking about leverage. They quoted total leverage at around 9x and I think it's really around 4x. They put out a revision. Obviously, the company has other problems so weakening wasn't just due to that report but I think it had some affect," the trader said.

Dana slips

Elsewhere, Dana gave back some of the gains the Toledo, Ohio-based auto components maker had notched Monday, when the bonds had been helped by the news that it was still in talks with its lenders on a new credit facility and hoped to have things wrapped up within two weeks. Dana also got a waiver from its lenders on a covenant relating to minimum credit ratings on an accounts receivable securitization facility.

But all of that was yesterday's news; the Dana 6½% notes due 2008, which had fallen the most last week on market rumors that the effort to line up the financing was in trouble, and then bounced back the most Monday, was again the biggest loser among the company's bonds, with one trader calling them down 1¼ points on the day at 64 bid, 65 offered. He also saw its 5.85% notes due 2015 down a point at 60.5 bid, 61.5 offered, while its 7% notes due 2029 were ¼ point lower at 61.25 bid, 62.25 offered.

Another trader saw the '08s down a point at 64 bid, 65 offered, while seeing the company's other bonds pretty much where they had been on Monday - the 6½% notes due 2009 at 64 bid, 65 offered, the 5.85s at 61 bid, 62 offered, and the 7% notes of 2028 and 2029 at 62 bid, 63 offered.

Yet another trader saw Dana's bonds about a point softer all around, with the 7s at 61.5 bid, 62.5 offered. He said that the retreat from Monday's highs might be on investor reaction to an article in The Wall Street Journal "talking about how they may have to pay their vendors sooner than anticipated; it was viewed obviously as a negative, and bonds were softer."

There was more bad news from Fitch Ratings, which downgraded Dana's senior unsecured notes to CCC from B. Fitch cited its concern that Dana's ability to obtain sufficient secured bank financing "may be constrained by unsecured bond indentures' limitations on liens covenant; a higher risk that liquidity needs could increase if suppliers were to begin to insist on cash terms; the potential for more aggressive restructuring actions, which could increase demands on cash; Dana's reliance on the declining sport utility vehicle (SUV) market; and the company's financial condition heading into a potential commercial vehicle downturn in 2007."

ArvinMeritor lifts auto sector

Elsewhere among the autos, ArvinMeritor's announcement that it will tender for most of several series of bonds helped give a little bit of firmness to the auto sector, which can certainly use all of the good news its can get. A trader saw upside movement in such names as Delphi Corp., whose 6.55% notes due 2006 were ¾ point better at 54 bid, 55 offered, although he saw Visteon Corp.'s 8 ¼% notes due 2010 were ¼ softer, at 79 bid, 80 offered.

The trader saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 at 70.25 bid, 71 offered, its General Motors Acceptance Corp. unit's 8% notes due 2031 at 91.25 bid, 91.75 offered, Ford Motor Co.'s 7.45% notes due 2031 at 71.25 bid, 72 offered, and the Ford Motor Credit Co.'s 7% notes due 2013 at 88 bid, 88.25 offered, all four of them up ¼ point on the day.

Another trader said that GM and GMAC "were moving around a little, but were still within a framework," before breaking out of their range to end a little bit better on the session.

He saw the GMAC 8s move up a point to 92 bid, 93 offered, while the financing arm's 6¾% notes due 2014 and 6 7/8% notes due 2011 were each up half a point at 88.5 bid, 89.5 offered, and 89.5 bid, 91.5 offered, respectively.

A market source at another desk saw the GMAC 6 7/8% notes due 2012 also half a point higher at 89.75.

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