Short covering boosts Tembec; Movie Gallery quiet, Blockbuster better

By Stephanie N. Rotondo

Portland, Ore., Dec. 24 - Distressed bond trading during the Christmas Eve session went as planned - that is, not too much happened.

"Nothing happened today," said one trader, "which you would assume for a Christmas Eve session."

Another trader said most of the players who were at their desks - which was not many - left by 10 a.m.

"And I didn't even get a message until 9:15 a.m.," he said.

The trader noted that there were not many "big trades" in the marketplace, let alone two-sided markets.

"You need two people to make a trade," he said. "And there is no one."

But at least one market participant was "trying to trade Tembec Inc.," the trader said. He added that it looked like the forest products company's debt had moved higher since Friday, continuing the momentum from last week.

News that Movie Gallery Inc. had filed its reorganization plan sparked little interest in the movie rental chain's debt. Blockbuster Inc., however, continued to see its notes improve.

Shorts boost Tembec

Last week, Tembec began moving up after the company announced a recapitalization plan that would convert $1.2 billion of debt into equity - thereby giving bondholders a majority share in the company.

The day before Christmas, the Canadian company's bonds were still gaining, with one trader calling the debt up a couple points.

The trader quoted the 7¾% notes due 2012 better at 49 bid, 50 offered, while another pegged the issue around 49. The second trader said the 8½% notes due 2011 were likewise around 49.

"They are all getting compressed together because they are all going to be worth similar [amounts]," the trader said of the company's three issues, which also include the 8 5/8% notes due 2009. With that, the trader said that some players are swapping their positions.

The trader attributed the day's movement to "probably some guy trying to cover shorts before the end of the year."

Another trader called Tembec's bonds firm, with its 7¾% notes up 1 point at 49, but he said "none of it really matters" because overall volume was so thin.

Over the weekend, Tembec said that it had received additional support for its refinancing plan. As of Sunday, the company had won support from noteholders who in total hold about $580 million of the company's debt.

Movie Gallery quiet, Blockbuster better

Two months after it filed for a prenegotiated bankruptcy, Movie Gallery filed its reorganization plan with the court overseeing its case.

Despite the optimism of the company's chief executive officer - in a statement made Saturday, Joe Malugen opined that the second-largest movie rental chain would be better positioned post-bankruptcy - investors were not interested in the company's debt.

One trader said that Movie Gallery's 11% notes due 2012 were "fading into the background," noting that he had not seen any markets in the name since the previous week. At that point, he said the bonds were 15 bid.

"I can't even recall seeing a quote on Movie today," another trader said.

At another desk, a trader said that "the only news out was on Movie Gallery, which came out with some info on the Chapter 11 filing - but there are no bonds trading. They talked about the first lien and second lien being intact. The 11% notes [due 2012] are pretty much gone, the equity holders will get zero."

He said that the bonds had been trading around 15 bid last week, but he saw "no trading" on Monday.

Blockbuster's bonds, on the other had, are continuing to show signs of improvement.

A trader pegged the 9% notes due 2012 at 85.5 bid, 86.5 offered, while another saw an 84.5 bid in the debt.

"They seem higher," the second trader said. He added that he saw nothing in Movie Gallery.

The first trader said that the Texas-based company's recent gains could be attributed to investor sentiment regarding Movie Gallery and the likelihood it will survive.

Under the Dothan, Ala.-based company's reorganization plan, existing shareholders will recover nothing, while noteholders and other creditors will receive new equity in the company. The company hopes to emerge from Chapter 11 by the second quarter of 2008.

"The 11% notes should go away," a trader said. "If you [i.e. the bondholders] owned 11% notes and you wanted to participate, you could instead take $10 million in cash that you might be able to get your hands on - but it works out to next to nothing.

"If you didn't [take the cash], they're going to get some sort of private equity, and the first- and second-lien guys are still intact almost in full, I believe, with the different covenants and indentures built into those bonds - but they were never really a part of our [high yield] universe anyway."

Paul Deckelman contributed to this article.

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