Blockbuster, Movie Gallery down on news; Danka bonds at call; Federal-Mogul dips

By Stephanie N. Rotondo

Portland, Ore., June 27 - As Blockbuster Inc. filed an 8-K Wednesday, stating it would seek amendments to its credit agreements, the company's bonds and bank debt dipped as well as those of rival Movie Gallery Inc.

Traders said the bonds of each movie rental retailer fell at least 3 points on the day, with some wondering if Blockbuster's news was an indicator of what was in Movie Gallery's future.

Elsewhere, a narrowed yearly net loss on decreased revenues helped Danka Business Systems plc's bonds hover near the call price. A trader also speculated that an early call might be near.

Investors might be getting antsy as Federal-Mogul Corp.'s confirmation hearing is put off for a couple of weeks. A trader attributed recent losses in the company's bonds to profit taking.

Still, traders reported that activity in the distressed bond market is continuing on its lackluster way.

"The bond market is gone, disappeared," quipped one trader. "It does not exist anymore."

"Everything got beat down bad in the morning," said another, commenting on the day's overall feel. "In the afternoon, it was like shell shock."

Another called the general market "wimpy," noting "the market opened down pretty good."

"Volatility is back in the market," he continued. "We are in for a rough patch in our market."

The trader went on to say that the collapse of the Bear Stearns-led hedge funds is "not a one-off situation." He speculated that it was just one in many that would soon be falling, "but without somebody to bail them out with $3 billion."

Movie Gallery, Blockbuster down

Movie Gallery's term loan B traded down considerably, in part because of distressed market weakness in which names were down in general by a point or two, and in part because of Blockbuster's amendment announcement, according to a trader.

The Dothan, Ala., video rental company's term loan B ended the day at 85 bid, 87 offered, down from previous levels of 90 bid, 92 offered, the trader said.

"Blockbuster is trying to get an amendment done. The numbers there are really [bad], so it pushed Movie Gallery down," the trader added.

Blockbuster's term loan B did not fall nearly as much, with levels going out at 99¾ bid, par ¼ offered, down from par bid, par ½ offered, a second trader added.

On the bond side, Movie Gallery also got beat down, as Blockbuster made what appears to be a long-term attempt to steal market share, a trader said.

The 11% notes due 2012 were quoted down at 70.5 bid, 72.5 offered, while the trader also saw Blockbuster's 9% notes due 2012 closed at 95 bid, up from the day's lows of 94 but down from the previous day's close at 96.5.

The trader said that Blockbuster's move to breach its covenants was likely an effort to "take market share from Movie Gallery." However, "in the short run, it will hurt, but in the long term it might be good."

At another desk, a trader called Movie Gallery's bonds down 4 points to around 72, while Blockbuster's were seen down 3 points to 94 bid, 95 offered.

"I take it as a fairly negative sign for the company and the creditors," the trader said of the Blockbuster news. "Obviously they need some flexibility...they are trying to buy themselves some time."

Elsewhere, a trader called the Number-Two U.S. video rental chain operator's notes at 71 bid, 72 offered, down 5 or 6 points on the session, even as Dallas-based industry leader Blockbuster's notes were off 2.5 points at 93.5 bid, 94.5 offered, "so that's down a couple [of points]."

Unlike some of the other distressed names, where he said there was a lot of quoting but not all that much trading going on, "there was a lot of trading in the Movies and the Blockbusters."

Another trader saw Movie's bonds at 70 bid, 72 offered, which he called down 3 points, while Blockbuster was down a deuce at 94.5 bid, 95.5 offered.

A market source at another desk saw the Blockbuster bonds end just below 94, down 2.5 points on the session, while the Movie Gallery bonds were down 3.25 points at 74, although they had firmed a little from a low earlier in the day of around 73 bid.

Yet another source called the Blockbuster issue down 2 points at 94.5 and pegged Movie Gallery ending 4 points lower at 73.

Blockbuster said in an 8-K filing that it would seek an amendment to modify the consolidated EBITDA, fixed charge coverage and leverage ratio requirements under its credit facility.

The proposed amendment would change the consolidated EBITDA covenant such that the trailing four-quarter requirement would range from $140 million for the period ending July 1, 2007 to $165 million for the period ending Jan. 6, 2008, and $180 million for period ending April 6, 2008 to $250 million for the period ending Jan. 4, 2009.

As for the fixed charge coverage and leverage ratios, applicability would be deferred from fiscal 2008 to fiscal 2009.

The company said that it needs the amendment as a result of significant investments in its online business and to provide it with the necessary flexibility to grow its share of the overall rental market by maximizing the opportunities presented by the growing online rental industry as well as the challenging in-store industry.

"Maybe in the long run this is good," the last trader said, "but for me, the perception is somewhat negative."

And, perhaps the situation is an indicator of what is going on with struggling Movie Gallery, which has been radio silent.

"No news is not necessarily good news with them," he said.

Danka near call

Office solutions provider Danka narrowed its yearly net loss on decreased sales, while its bonds were seen trading around the call price.

A trader said the 11% notes due 2010 were trading near the call price at 105.625 bid, 105.875 offered.

The trader also noted that the bonds, which have a 6% to 7% yield, are expected to be called early, giving a date of July 27.

The St. Petersburg, Fla.-based company said in a press release Wednesday that proceeds from the sale of its European operations, as well as a new $145 million credit facility, would be used to repay debt and enhance working capital.

In the release, the company said it posted a net loss of $29.2 million for the fiscal year ended March 31, compared with a loss of $85.2 million the previous year. Revenues for fiscal 2007 fell to $450.2 million from $522.4 million in fiscal 2006.

"From a financial perspective, fiscal 2007 was about fixing the company's liquidity and capital structure," commented Edward K. Quibell, chief financial officer, in the release. "While there is still work to be done, the progress achieved to date goes a long way toward completing the successful turnaround of the company."

Federal-Mogul dips

Profit takers were deemed to be the culprit for Federal-Mogul's weakness in its bonds. A trader said the Southfield, Mich.-based automotive parts manufacturer's bonds - which tend to trade in line with one another - "retreated" as low as par ½ during the day but managed to come up a bit to 101 bid, 101.5 offered.

The company's confirmation hearing began last week, but, as no approval was given, the hearing was continued to July 9 and July 10. After that time, supporters and opponents alike will have the opportunity to file briefs until Aug. 31. Final arguments are scheduled for Oct. 1.

Federal-Mogul filed for Chapter 11 protection in 2001.

In the rest of the distressed automotive realm, a trader saw Remy International Inc.'s 11% notes due 2009 up 2 points on the day to 99 bid, par offered and saw the troubled Anderson, Ind.-based auto electrical systems maker's 8 5/8% notes slated to come due later this year at 110.5 bid, 111.5 offered, up a point.

Another trader saw Dana Corp.'s 7% notes due 2029 off a point at 102 bid, 103 offered. The source said Dura Automotive Systems Inc.'s 8 5/8% notes due 2012 "didn't look like they'd changed much" at 63.5 bid, 64.5 offered and said that he "did not notice" anything going on in Delphi Corp.

Primus better

Primus Telecommunications Group Inc.'s bonds continue to get better, despite no news out to move the bonds.

A trader said activity has picked up in the bonds, quoting the 8% notes due 2014 a point higher at 72 bid, 73 offered. Another trader echoed those figures, stating the bonds were "a little better."

Calpine dips

A market source saw Calpine Corp.'s bonds lower, with its 8¾% notes coming due later this year at 124 - a 3-point fall on the day, although no fresh news was seen out on the bankrupt San Jose, Calif.-based power generating company.

In other energy related names, a trader saw James River Coal Co.'s 9 3/8% notes due 2012 off a point at 96 bid, 97 offered, while other coal names were also lower - Arch Western's 6¾% notes due 2013 eased to 96 bid, 97 offered, and Massey Energy's 6 7/8% notes due 2013 retreated to 91.75 bid, 92.75 offered, also down a point.

Aveta higher

Aveta Inc.'s term loan headed higher on Wednesday in an otherwise soft distressed loan market as the company held a bank call at 3 p.m. ET, according to a trader.

The term loan ended the session at 84½ bid, 86½ offered, up from previous levels of 80 bid, 82 offered, the trader said.

"There are positive business developments in terms of the Puerto Rico business," the trader explained.

Aveta is a Fort Lee, N.J., for-profit company focused on Medicare Advantage and the health care needs of the chronically ill.

Broad market weaker

A trader said Sea Containers Inc.'s 10½% notes due 2012 were down 1.5 points to 2 points on the day at 92 bid, 94 offered, while Spectrum Brands was also "down a bit," the Atlanta-based consumer products company's 7 3/8% notes due 2015 losing about 1.5 points to 2 points to end at 80 bid, 81 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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