XM, Sirius bonds in orbit on merger news; Movie Gallery up; Rexnord sells toggle loan

By Paul Deckelman and Paul A. Harris

New York, Feb. 20 - Bonds of XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. were each seen having moved up two to three points on the session Tuesday in reaction to the news that the two satellite radio broadcast rivals plan to merge. However, traders said that the bonds finished below their early highs as investors wondered whether the big deal will pass anti-trust muster with federal regulatory agencies.

Elsewhere, Movie Gallery Inc.'s bonds rose after the Dothan Ala.-based Number-Two U.S. video rental chain operator announced details of some $900 million of new senior secured financing, which in turn caused Moody's Investors Service to lift its outlook on Movie Gallery's Caa1 corporate family debt rating to positive from stable.

Sell-side sources said that the broad high-yield market firmed as trading resumed on Tuesday following the three-day Presidents Day weekend.

Two officials, each one a member of a different high yield syndicate desk, told Prospect News that the market continues to be impacted by a scarcity of bonds for sale relative to the cash that the buy-side seems to need to put to work.

"It feels as though the market is still looking for paper," one reflected.

Meanwhile in the primary market, although no junk bond deals were priced the market did hear terms on Rexnord Holdings Inc.'s upsized term loan.

The deal was priced off the high yield syndicate desk, and the loan will be exchangeable into notes after one year.

XM, Sirius gain altitude

Sirius' 9 5/8% notes due 2013 and XM's several issues of bonds, particularly its 9¾% notes due 2014, were seen having moved up on the news that the two bitter rivals had agreed to a merger of equals in hopes of realizing tens of millions of dollars of synergies.

Sirius and XM were "the big news of the day," said a trader, who observed that the two issues "initially rallied pretty dramatically - they were up 4 or 4½ points right out of the chute" Tuesday morning on the news of the prospective merger that surfaced over the long holiday weekend.

"They've since come back to Earth," he continued, with each issue going out around the 102.5-103 context, up from prior levels just around par.

He said the market consensus seemed to be that the union of the two companies "probably won't trigger any kind of change of control, so the debt will probably remain outstanding."

The upside of the planned combination, he continued, is "tremendous savings, obviously," with redundant operations to be cut and synergies to be realized in such areas as "advertising and technical support and that kind of thing. They'll be able to take a lot of [wasted] money out of the combined company and that gave the bonds a lift."

There's a catch to everything, of course, and the catch here is that "there are some significant hurdles," with the Federal Trade Commission and the Federal Communications Commission expected to cast a wary eye on the union of the two companies. "They're going to have a lot to prove in terms of competitiveness, since you're taking out about the only two companies" that provide the satellite radio channels on a large enough scale to be viable. "So the jury is still out."

Another trader likewise saw those two issues "both get as high as 103-104, and then close at 102-103, up about 3 points."

He also saw XM's floating-rate notes due 2013 hit a high of 101.25 bid, 101.75 offered before ending at 101 bid, 101.5 offered, which he called up 2 or 3 points on the day.

Equity holders seemed to not be too fearful at the prospect that the feds could step in and disallow the deal between the Washington-based XM and its upstart New York-based competitor. XM's Nasdaq-traded shares jumped $1.43 (10.23%) to end at $15.41 on volume of 81.1 million shares, about nine times the usual activity level. Meanwhile, Sirius' Nasdaq-traded shares were even more busily traded, with 260.8 million shares moved, over five times the norm.

Away from the XM-Sirius bonds, the first trader said, "the market was dead quiet. It was firm once again, up ¼ to ½ point across the board, but very, very, very light flows."

Movie Gallery moves up

One of the traders saw Movie Gallery as the only significant mover on the session outside of XM and Sirius. He saw major activity in Movie Gallery's 11% notes due 2012, which he said had gone from late-Friday levels around 85 bid, 86 offered to a Tuesday peak at 90 bid, 91 offered, and then had closed at 88 bid, 90 offered.

Another trader said that the Movie Gallery bonds hit levels that "we haven't seen in over a year."

"A week ago," a third trader said, "those bonds were at 82-83. They moved up [in the next few days] to as high as 90, got crushed, but then came back."

As the deal was launched to lenders at a bank meeting Tuesday, Movie Gallery announced details of its $900 million of new senior secured financing, which will consist of a $100 million revolving credit facility, a $525 million first-lien term loan, a $25 million synthetic letter of credit facility and a $250 million second-lien term loan.

That caused Moody's Investors Service to lift its outlook on Movie Gallery's Caa1 corporate family rating to positive from stable. The ratings agency cited the company's prospective improved liquidity, given the financing announced Tuesday.

The good liquidity and ratings news more than offset any bearishness investors may have felt reading the preliminary quarterly numbers the company released, which showed that the Hollywood Video operations helped to drag down parent Movie Gallery's earnings.

Those preliminary fourth-quarter and full-year numbers show same-store revenues company-wide down 2.9% from year-ago levels - largely due to the 4.1% slide in comps at the Hollywood stores. By contrast, Movie Gallery's own eponymous stores saw sales ease just 0.3%

Hollywood Video, the company's largest branded business, still did produce the most revenue in 2006, $1.35 billion, followed by the smaller Movie Gallery rental chain's $868 million of revenues, and the $325 million generated by its Game Crazy video game unit. Total revenues for the year were $2.54 billion, with $102 million of operating income.

The company will release its full results next month.

Viskase move looks to be over

Traders saw no further rise in the bonds of Viskase Cos. Inc., which had jumped around 20 points into the low 90s on Friday, albeit in the kind of light pre-holiday trading that gives exaggerated impact to smaller trades of illiquid issues like the Darian, Ill.-based sausage-casing maker's 8% notes due 2008.

"There were no trades today," said one trader who had seen those bonds on Friday having moved up to the 92 bid, 94 offered level.

"It's a very thin issue - there's not many of them around," he observed, "so it's not going to be active by any means." On Friday, about $7 million of those bonds had changed hands, some in large block trades of $100,000 or more, which market participants called relatively "huge" volume for that particular name.

"I think they were just cheap, and people realized that there's some sort of equity deal or rights offering coming later on this month," he said, in trying to explain the sudden jump in the previously little-traded bonds. He said the bonds had languished in the 70s for a while, but on Friday "somebody wanted to sell them and somebody wanted to buy them, and they finally agreed upon a price."

No move for Delphi despite deal

Among the automotive issues, a trader said the bonds of Delphi Corp. were pretty much unchanged, despite the late-session news that the bankrupt Troy, Mich.-based auto parts maker has come to a preliminary agreement to sell its interiors business to billionaire investor Ira Rennert, on undisclosed terms.

Its 6.55% notes due 2006 were already "pretty high," at 111.5 bid, 112.5 offered.

Another trader said that the late-breaking news could give those bonds and other Delphi paper a boost in Wednesday's session.

Dana Corp. bonds were seen up half a point "across the board," a trader said, with its 6½% notes due 2008 at 77 bids, 78 offered, a trader said.

Majestic move

A trader saw Majestic Star Casino LLC's 9¾% notes at 97 bid, 98 offered, which he called up a point on the day and up 3 points from where they had been a week ago.

However, he saw no news on the Las Vegas-based gaming company that might account for the rise.

Fedders up slightly

Air conditioner manufacturer Fedders Corp.'s recently volatile bonds were seen slightly better at the start of the week, after previously seeing a week of losses.

Rumors of default had plagued the company and traders speculated about whether the company would refinance its term loan.

At the close of trading, traders said the 9 7/8% notes due 2014 were trading in the low-60s, with one insider placing the bonds a point higher from Friday at 61.

After the holiday weekend, Fedders filed an 8-K with the Securities and Exchange Commission, amending the term loan and briefly extending the maturity date.

According to the amendment, the Liberty Corner, NJ-based company is required to pay principal installments of $300,000 on Wednesday, Feb. 21, and on each successive Wednesday through March 14. The remaining balance, plus an extension fee of $500,000, is due Friday, March 16. The fee may be reduced to $350,000 if the debt is paid in full before that date.

Fedders also said in the filing that it is continuing to pursue negotiations with other lenders regarding a new senior secured credit facility that would replace its existing facility with Wachovia Bank and The CIT Group Business Credit, Inc. The amendment was completed on Feb. 16.

Rexnord upsizes loan

In the primary, Milwaukee-based power train company Rexnord priced an upsized $450 million senior unsecured PIK toggle term loan at 98.00 on Tuesday.

The cash-pay coupon was set at Libor plus 625 basis points. That rate increases by 75 basis points to Libor plus 700 basis points should the company elect to pay in kind.

Price talk was Libor plus 625 basis points at a reoffer price of 98.00 to 99.00 - hence the Rexnord deal came on the wide end of the price talk.

Credit Suisse and Banc of America Securities LLC led the dividend deal which was upsized from $400 million.

Quiet start

Aside from the news on the Rexnord term loan the primary market produced very little news during the Tuesday session.

US Oncology Holdings, Inc., announced that it will make a $400 million offering of senior unsecured floating-rate PIK toggle notes.

Citigroup will lead the debt refinancing and dividend funding deal from the Houston-based cancer treatment and research network.

A market source told Prospect News that the deal is expected to launch in late February or early March.

Elsewhere a company source told Prospect News that the financing for the leveraged buyout of Pinnacle Foods Group Inc. by The Blackstone Group will involve new bonds.

Lehman Brothers will be involved in the high-yield deal which is expected to come to the market in March.

Blackstone is buying Pinnacle Foods - a New Jersey-based food products company that is perhaps best known for its pickles - from J.P. Morgan Partners, LLC, J.W. Childs Associates, LP, CDM Group and former bondholders of Aurora Foods Inc. for $2.16 billion in cash.

And Altra Holdings, Inc., the parent of Mass-based power transmission company, Altra Industrial Motion, plans to bring to market an add-on to its 9% senior secured notes due December 1, 2011 (existing ratings B3/CCC+).

The size of the offering remains to be determined.

The deal, which will be led by Jefferies, is expected to launch in late March or early April.

This week's deals

Caribbean wireless telecommunications network operator, Digicel Group Ltd., is marketing $1.4 billion of eight-year senior notes in two tranches which are expected to price on Thursday.

Digicel is offering $1 billion of cash-pay notes and $400 million of PIK toggle notes via Citigroup and JP Morgan.

An informed source told Prospect News that price talk is expected on Wednesday, with pricing to follow on Thursday.

The source added that Digicel's existing notes firmed during the Tuesday session.

Price talk is also expected, Wednesday, on Key Plastics Finance Corp.'s $115 million offering of six-year senior secured notes (B2/B), via Jefferies.

Meanwhile pricing is expected on Friday for American Railcar Industries, Inc.'s $250 million offering of seven-year senior unsecured notes, via UBS Investment Bank.

Also expected to price Friday is the Esterline Technologies Corp. $150 million offering of 10-year senior notes (BB-), a deal being led by Wachovia Securities.

Stephanie N. Rotondo contributed to this report

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