Movie Gallery bank debt firms, bonds melt; Dana continues rise

By Paul Deckelman and Sara Rosenberg

New York, March 8 - Movie Gallery Inc.'s term loan closed out the session slightly stronger on a day-over-day basis despite the lack of good news on the company's stock and bond side, possibly on the belief by loan investors that rates and fees will bounce up in connection with the latest amendment request.

But its bonds were moving in the opposite direction, dropping another three to four points, traders said - this on top of losses Tuesday estimated at between three and five points - with investors growing increasingly pessimistic about the Dothan, Ala.-based video rental chain operator's chances of staying solvent and avoiding Chapter 11.

"They're toast, I think," a trader said - adding that at his distressed-debt shop, "we've thought that for a while."

Elsewhere, Dana Corp.'s bonds seem to be proving that there's life after debt - or, at least, life after a Chapter 11 filing. The troubled Toledo, Ohio-based auto components maker's bonds continued to firm smartly, as they have since last Friday's filing, with some in the market suspecting that the rise might be linked to anticipated activity in the credit default swaps market.

Movie Gallery's term loan closed out the day quoted at 91.25 bid, 92 offered, a trader in the bank paper said. On Tuesday, the bank debt had dropped as low as 89.5 bid, 90.5 offered in the wake of the company's request to its lenders for an amendment to its credit facility, but it then recouped some of that lost ground to get back to the 91 bid, 91.75 offered context before the day was through.

Before Monday's lender call, the term loan had been quoted in the 92 bid, 93 offered region.

The company's stock nosedived 64 cents (20.58%) in busy Nasdaq trading to close at $2.47 - and then proceeded to dip further to $2.30 in after-hours trading.

On the bond side of the ledger, its 11% notes due 2012 have "gotten crushed" over the last two sessions, a trader said. They were seen having fallen several points Tuesday to around the 60 bid level, and continued to swoon as low as a 56.5-57 bid context Wednesday.

Movie Gallery held lender calls on Monday afternoon - first for its public lenders and then for private lenders - to discuss the overall business environment and the amendment of financial covenants. The company is not currently in default under its covenants - but looking forward relief will be needed.

During these calls there was talk of an amendment fee and an increase in pricing on all tranches, sources have previously told Prospect News.

Movie Gallery finally confirmed on Wednesday what had already been known in the market since Monday - that it had spoken with its creditors to discuss amending the terms of its loan agreement to give the company some breathing room. Should the lenders go along with Movie Gallery's request for easier terms - at the cost of the amendment fee and the increased pricing - the new terms would take effect on March 15.

It hired the investment banking firm of Peter J. Solomon Co. to advise it in its discussions with lenders, a company spokesman said.

Much of the discussion during Monday's session centered around the challenges facing traditional video rental firms like Movie Gallery and its larger rival, Blockbuster Inc. Both have seen their revenues falling, hurt by a combination of a lack of sure-fire hit movies that will bring customers to their stores, as well as the growing popularity of other forms of movie delivery, such as the increasingly popular Netflix service and, potentially, Walt Disney Co.'s new MovieBeam operation.

"They had to go to their banks to get relief because this quarter's going to be horrible," a trader said.

"Supposedly what they told their banks is the quarter's going to be really horrible," he said, adding emphasis. "We think the problem's going to be that if the trade cuts them off, then whatever the banks do doesn't matter," he said, referring to suppliers from the studios who churn out the DVDs of new movie releases to the confectionary suppliers who stock the front-end candy displays.

"You need product to sell," he explained, "and if all of the studios say 'there's no reason for us to deliver to you, we don't want to be an unsecured creditor when you file,' then they have nothing to sell. Then they have to file so they can get a DIP loan to stay in business."

The possibility of a bankruptcy filing was raised Wednesday by at least one prominent brokerage, as Bear Stearns cut its stock price target to $1 from $3 previously, and mentioned the dreaded "B-word" in a research note, further spooking both debt and equity investors. "With no future cash flow generation in our forecasts," the brokerage company's investment note cautioned, "we believe that there may be no residual value for equity holders in a bankruptcy scenario."

Ironically, Movie Gallery's bonds and its shares - which had been battered in early February by investor fears about the new Disney service but then recovered from an oversold condition - had been firming about two weeks ago, spurred by some market scuttlebutt that the company might make an attractive takeover target or that management might do an LBO. Such speculation proved to be unfounded.

"Yeah, there were rumors," the trader said, "but I never believed that one, because you look at what it could cost to buy it," with over $1 billion of debt on the books that had to be assumed, "and they have no free cash flow to pay for it." Besides the debt, "at the time, the stock still had some value, so you're going to pay $1.2 billion, or $1.3 billion for this company that doesn't make any money.

"I've seen people do silly things," the trader concluded, "but that's going a little too far."

Dana rises again

Elsewhere, Dana's bonds continued to firm, with a trader seeing its 6½% notes due 2008 up another 1½ points at 71 bid, 71.75 offered , its 5.85% notes due 2015 at 70 bid, 70.75 offered, a 1¼ point gain, and its 7% notes due 2028 at 71 bid, 71.75 offered, up 1¾ points.

And Dana's bonds might soon be pushed further upward because of the dynamics of the credit default swaps market, according to analysts at Bank of America Securities. In a research note, strategist Jeffrey Rosenberg wrote that "we look for a short squeeze in Dana."

He noted that the 5.85% notes - the company's "cheapest-to-deliver" issue - had moved up solidly since March 2, the day before Dana filed for Chapter 11, when those bonds were at 65 bid, 66 offered, and were up even more sharply since Feb. 28, when they were quoted at 61 bid, 62 offered.

Dana, the research note said, has only $2 billion of bonds (including some $450 million of the 5.85s) deliverable against CDS contracts.

In the volatile CDS market - where contract issuers sell protection against defaults in a company's debt - often to bondholders, though by no means only to them - it is not uncommon for contracts to be out totaling many times the outstanding face amount of a company's bonds. Functioning not unlike an insurance policy, the contracts pay the buyers - who all along have been making payments, similar to insurance premiums - at the bond's par value in the event of a default, once the buyers have delivered the bond to the contract sellers. While many of the contracts can be settled for cash in lieu of the actual delivery of bonds (the contract buyers get the difference between a settlement price determined by the major derivative industry companies and par) many of the contracts require the actual delivery of bonds within 30 days of the default. As that deadline approaches, this tends to push the price of the bonds upward.

By way of comparison, Rosenberg pointed out, Delphi Corp., which sought Chapter 11 protection in October, had about $2.15 billion of bonds that could be delivered against many more contracts - and the need for such bonds caused a short squeeze that zoomed them up to a peak level of 72 just before the CDS contracts settled from about 58 at the time of the filing.

It should be noted, however, that such a squeeze is invariably short-lived; immediately after the Delphi contracts settled and the need for bonds to fulfill them dissipated - thus removing a major factor that was propping up the bonds' price - Delphi retreated into the high 60s. The bonds have gradually come down since then, and now languish back in the upper 50s. Delphi's 6.55% notes due 2006 were at 58 bid, 59 offered Wednesday, and its 7 1/8% notes due 2029 were at 59 bid, 60 offered, both 1½ points higher on the day.

Not everyone necessarily agrees with the short-squeeze scenario. One trader, while seeing the bonds continuing to firm, opined that the CDS short-squeeze factor "was probably already priced in" in the bonds' prices.

And another trader noted that in the Delphi bankruptcy and that of Delta Air Lines Inc., most of the contracts were allowed to be settled in cash, taking away some of the upward propellant of the bonds, "and I'd bet that's exactly what will happen here - they'll allow you to settle in cash.

"I don't know if it's that [CDS scenario] or there are an awful lot of people who're taking a very hard look at this to try to evaluate it. They're just maybe thinking that there's value in this company.

"I'd be very surprised if the only reason [Delta's bonds have been going up] is because people are expecting a run-up because of the CDS," he concluded.

Separately, Fitch Ratings said it may downgrade its ratings its ratings on 17 collateralized debt obligation tranches due to their exposure to Dana debt. The agency said it will decide whether to downgrade the CDO tranches, which represent six separate transactions, once final valuations for Dana in each transaction become available.

Fitch's announcement follows similar advisories earlier in the week by Standard & Poor's and Moody's Investment Service.

Exide slips again

Alpharetta, Ga.-based auto battery maker Exide Technologies' 10½% notes due 2013 - which fell about four or five points over the previous two sessions after the company warned of likely lower EBITDA for the current quarter and probable covenant problems as a result - continued to skid lower Wednesday. They lost another 1½ points to 72 bid, 73 offered.

Dura up

Also in the automotive area, a trader saw Dura Automotive Systems Inc.'s bonds "a little stronger as well, with its 9% notes due 2009 At 48.5 bid, 49.5 offered and its 8 5/8% notes due 2012 at 78.5 bid, 79.5 offered, both up a point.

A trader saw General Motors Corp.'s 8 3/8% notes due 2033, which had been on the rise over the past few sessions, off half a point Wednesday at 72 bid, 72.5 offered, while General Motors Acceptance Corp.'s 8% notes due 2031 were unchanged at 92 bid, 92.5 offered. Ford Motor Co.'s 7.45% notes due 2031 were half a point lower at 71.25 bid, 71.75 offered, while its Ford Motor Credit financial arm's 7% notes due 2013 were steady at 87.25 bid, 87.75 offered.

Outside of the autos, Northwest Airlines Corp.'s bonds gained a little altitude to 38 bid, 40 offered, up a point on the day and up around two points on the week so far, given lift by the news earlier in the week that the bankrupt Eagan, Minn.-based airline carrier had reached agreement with its pilot's union on additional wage and benefit concessions, thus avoiding the possibility of a strike.

And Calpine Corp. debt continued to ease, with the bankrupt San Jose, Calif.-based power generator's 8¾% notes due 2007 seen at 48 bid, down a point on the session.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.