Movie Gallery mauled on late news; Dobson up on telecom buyout; Trump gets dumped

By Paul Deckelman and Paul A. Harris

New York, July 2 - The third quarter started off with a bang on Monday as Movie Gallery Inc.'s bonds swooned dramatically late in the day after the troubled company admitted that it had not met some of its debt covenants and would be forced to seek help from its lenders and consider strategic options that could include the sale of the company.

Elsewhere, merger-mania seemed to be the major trend of the day, with the bonds of Dobson Communications Corp. and Virgin Media up on M&A news - while conversely, Trump Entertainment Resorts Inc.'s bonds took their lumps after the Atlantic City, N.J. -based casino operator announced that efforts to sell itself had proven unsuccessful. And IKON Office Solutions Inc.'s bonds fell sharply after a major shareholder told the company it should either to buy back its stock at a premium - or be prepared to put itself up for sale.

In the primary market, little was going on, with participants having pretty much battened down the hatches ahead of the impending Independence Day Holiday, which will see an abbreviated session on Tuesday and a full market close on Wednesday.

A high yield portfolio manager told Prospect News that the broad market had been very quiet on Monday, and added that a considerable number of players have turned the days surrounding Wednesday's celebration of Independence Day, in the U.S., into vacation time.

The primary market failed to turn out any news of significance, although terms did emerge on a previous pricing by Securus Technology of a smallish add-on to its existing 11% secured notes due 2011.

Movie Gallery gets mashed

One of the most obvious movers in trading was Movie Gallery, whose bonds were in freefall in the last hour of trading Monday, losing more than half their value by some accounts after the troubled Dothan, Ala.-based Number-Two U.S. video rental chain operator issued a statement in which it said that it had been unable to meet some of its financial covenants, was in talks with its lenders, and would consider strategic alternatives, possibly including the sale of the company.

"There was quote a lot of movement in these Movies," a trader said, adding: "They really got a smack."

He saw the company's unsecured 11% notes due 2012 nosedive to as low as 28 bid, 31 offered from prior levels in the mid-60s, before finally settling in around 32.

Another trader quoted the 11s at 40 bid, 50 offered, which he called a loss of some 25 points on the session. "There was news earlier that things were going not so well. They dropped very drastically."

A market source saw the bonds trading for most of the day in the mid-to-upper 60s, down a little from a closing level on Friday around 69.5 - but then nosediving after the bad news hit the tape at around 4:30 p.m. ET, first down to around the 50 level, and then all the way down into the upper 20s within the last hour of trading, in busy dealings involving large bloc trades. The bonds finally settled in a 26-28 context.

Movie Gallery's Nasdaq-traded shares had been essentially unchanged at $1.89 during the regular trading session, but the stock plunged some $1.05 (55.56%), to 84 cents in after-hours dealings as of 7:59 p.m. ET. Combined volume of over 2.5 shares was about three times the average daily handle.

In its late-day statement, Movie Gallery admitted that as a result of "significantly softer than expected results" in the second quarter, the company was not able to meet financial covenants contained in its senior credit facility for the fiscal quarter ended July 1.

Movie Gallery said it was in talks with its lenders, led by Goldman Sachs Credit Partners LP, the administrative agent for the credit facility, and said that it would develop a plan to remedy the defaults. Such remedies could include seeking a waiver or amendment of the covenant provisions, asking lenders and bondholders for forbearance or a similar agreement.

Movie Gallery also said that it is considering "asset divestitures, recapitalizations, alliances with strategic partners, and a sale to or merger with a third party."

The company said that it plans to operate its business "without interruption while it engages in discussions with its lenders and evaluates strategic and restructuring alternatives." To tide its over this period, Movie Gallery has drawn down whatever remaining credit it had available under its revolver facility, and currently has about $50 million of available cash on hand.

The company further said that it would attempt to conserve cash and improve its profitability; among the avenues it may take to do this are accelerating the closure of unprofitable stores, consolidating stores in certain markets, realigning its cost structure to better reflect its reduced size, and seeking a more competitive capital structure.

Dobson deal boosts bonds

The Movie Gallery fiasco overshadowed what had up till that point been the major trend of an otherwise generally quiet and unimpressive pre-holiday session - the impact of merger and acquisition developments on several high yield issuers.

Chief among these was Oklahoma City-based Dobson Communications, which announced Friday after trading had wound down for the day and week that it would be acquired by telecom giant AT&T Inc. for $2.8 billion, with the total value of the deal, including debt assumption, pegged at $5.1 billion.

A trader saw its 8 7/8% notes due 2013, its most heavily traded issues, up 3 points on the session, at 107 bid, 108 offered, on the news. Another trader saw those bonds at 107.5 bid, 107.75 offered, which he also called a 3 point bulge.

A market source saw the 8 7/8s ending at 107.5 bid, just under a 3 point gain, while its 8 3/8% notes due 2011 were up about 2 points at 106.5 bid, and its 9 7/8% notes due 2012, issued by its Dobson Cellular Systems subsidiary, ended about 7/8 point higher at 108.75

Virgin up on Carlyle offer

Another telecommunications company getting a boost on M&A news Monday was U.K. provider Virgin Media - the combination of the old NTL Cable plc, Telewest plc and Virgin Mobile.

Its NTL Cable 9 1/8% notes due 2016 was seen up 2½ points to 107.5 bid, 108.5 offered, while its NTL 8¾% notes were up a deuce at 105.5 bid, 106.5 offered in apparent reaction to the news that the New York-based company had received a buyout offer worth as much as $11.35 billion. Those reports named the Carlyle Group private equity firm as the would-be buyer, guesstimating the size of its purported bid at between $30 and $35 per share.

Virgin Media meantime declined to confirm the speculation that Carlyle was the potential buyer, in fact warning that the deal would be scrapped if it even disclosed the potential terms.

Virgin Media has recently been reviewing its "strategic alternatives" - possibly including the sale of the company - with adviser Goldman Sachs.

Trump slumps as sale is dumped

An M&A event that is not going to happen was responsible for a sharp slide in Trump Entertainment Resorts' 8½% bonds due 2015.

Traders saw those bonds down around a 95-95.5 context on Monday - down about 4 points from the 99ish area they had finished at on Friday, and well down from the recent peak levels around 103.5 which the bonds had held on investor optimism that the company was going to be sold

But it now looks like the casino operator will be going it alone. After more than three months of efforts to find a buyer for the company, Trump admitted that the odds of a sale at this point are pretty long.

It said that the "indications of interest" it had received for its three casinos received had not met its expectations.

"Now we will continue as we have to focus on our strategic operating plan," including a concerted effort to get more high-rollers playing at its three casinos.

IKON off on stock buyback possibility

Also on the downside, IKON Office Solutions' 7.30% notes due 2027 were seen having fallen nearly 8 points to the 84 level after the Malvern, Pa.-based company received a demand from Number-Three shareholder Warren G. Lichtenstein calling on management to enhance shareholder value by either buying back company shares at a premium, or else put itself up for sale.

There was no immediate response from IKON.

Run-up to the Fourth

Only two prospective issuers have deals in the market expected to price before the Wednesday holiday.

ServiceMaster Co. is attempting to place a restructured $1.15 billion offering of eight-year senior notes (B3/CCC+).

The Downers Grove, Ill., provider of home maintenance services is offering a $575 million tranche of cash-pay notes, which it has talked at the 10½% area.

The company is also offering a $575 million tranche of PIK toggle notes which it has talked at the 11% area, with a 100 basis points coupon step-up should the issuer elect to make an in-kind, as opposed to cash, payment.

The books were scheduled to close at 2 p.m. ET on Monday.

Previously the company had been in the market with a single $1.15 billion tranche of eight-year notes.

JP Morgan, Citigroup, Goldman Sachs & Co., Morgan Stanley and Banc of America Securities LLC are joint bookrunners for the LBO financing.

Some market observers had been anticipating terms to emerge on Monday. However, well after the Monday close no terms were available, according to market sources.

A source from the buy-side said that it would come as no surprise if the deal did not price until the post-Fourth of July week, meaning the July 9 to July 13 week.

High Arctic imminent

Elsewhere High Arctic Energy Services Trust, a Red Deer, Alta., provider of specialized oilfield equipment and services, is in the market with a $130 million offering of five-year fixed-rate bonds which it has talked at 10¼% to 10½%.

SEB Merchant Banking and Swedbank, both Norwegian banks, are the arrangers for the offering.

Jed Wood, the president and chief executive officer of High Arctic, told Prospect News in an email message that terms could be available by the time the market closed in Europe.

The High Arctic CEO allowed, however, that "summer holidays and long weekends in combination with tougher bond market are slowing everything down."

Executions: May vs. June

A high yield syndicate official told Prospect News on Monday that comparing June executions in the junk bond primary market to those which took place in May paints a vivid picture of the market's recent downturn.

The source spotted May global issuance, excluding emerging markets, at $28.4 billion.

The official added that among May's deals 50% were priced at the low end of price talk or lower, while 38% were priced "at price talk," and only 12% were priced at the high end of price talk or higher.

June, however, is another story.

This official gave a June global issuance total of $31.1 billion, excluding emerging markets. Among the deals that were priced in June, only 16% priced at the low end of price talk or lower, while 41% priced at price talk. And 43% priced at the high end of price talk or higher.

Hence, deals pricing at the high end or higher accounted for 43% of June issuance, after having comprised a mere 16% of May issuance.

Negative attention

Roundabout the high yield market, stretching back 18 months and more, sources on both the buy-side and sell-side had told Prospect News that funds flow figures released every Thursday by AMG Data Services seemed less and less relevant to the liquidity picture in the high yield market.

Almost all of these sources reasoned that the high yield asset class was awash with cash from hedge funds, which would not figure into the AMG weekly tally.

Lately, however, sources seem to have undergone a change of heart with respect to the AMG number.

"People are definitely paying attention right now," said one sell-sider who spoke to Prospect News early on Monday morning.

That is because AMG has reported that for three weeks in a row that high yield mutual funds have seen significant outflows, the source added.

Most recently AMG reported a $438.6 million outflow for the week to June 27. Then there was a $502.5 million outflow for the week to June 20. And there was a $399.6 million outflow for the week to June 13.

The average is negative $447 million for the past three weeks.

The redemptions trim the year-to-date flows to a meager $236.9 million among funds that report to AMG on a weekly basis.

One sell-sider noted that the onset of these outflows more or less coincides with the downturn in junk.

Another, specifying that it's too early to say whether the redemptions seen in the mutual funds are having an impact in the overall liquidity of the high yield asset class, conceded that the three consecutive outflows at least imply an increased amount of risk-aversion that has taken hold in the junk market.

Dollar General seen lower

Recently issued bonds from Dollar General Corp. were lower in Monday trading.

The Goodlettsville, Tenn.,-based discount retailer's 10 5/8% senior cash-pay notes due 2015 (Caa1/CCC+), which it priced at 98.027 to yield 11% last week, were pegged by a trader at 95.5 bid, 95 7/8 offered.

When Prospect News asked the trader why the new bonds were weakening, the source said: "That's a good question.

"They were priced with an 11% yield, we actually thought they would trade up."

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