Movie Gallery edges up; Tembec active; Auto sector mostly firm; Spectrum Brands dips

By Stephanie N. Rotondo

Portland, Ore., June 13 - As volatility in the 30-year Treasury bonds increased Wednesday, market players were starting to look for cracks in the distressed bond market.

A trader said the long bond hit a low in Asian markets, as well as in the U.K. However, the bonds regained some power, moving up at least 2 points in the U.S. markets to close at 92.

"That is a big move," the trader said, adding that the notes are now looking at a 5¼% yield.

The trader said that increasing Treasury rates won't stop people from investing, but could cause wider spreads in distressed names. Also, the activity in the bonds could also signal the "beginning of a real distressed market recurring again."

"I think people are shocked to think that this might be happening," he said.

Shocked may not be the appropriate word, as the market - which has been very slow of late - is in need of a kick start.

"People are just waiting for the other shoe to drop and it's not dropping," another trader said. "The rates going up may be a sign of the [distressed] market coming back. We definitely need rates to go higher [for that to happen]."

But, in the current state of affairs, market players are "tapped out."

"Nobody wants to chase these things anymore," the trader continued. "It is tough to get new people involved in the names. People are just scratching their heads."

The trader also said that the current market also shows little risk/reward.

However, traders did note that Wednesday trading seemed to be more active.

"Today was a little bit of a bounce," one trader said.

"Bids were filling back in," said another, "especially with Treasuries and equities rallying."

Movie Gallery Inc.'s bonds got off to a slow start but managed to end the day a touch higher as shareholders vetoed a plan to increase the amount of shares.

The company declined to comment further on the veto, other than what it had reported in its 8-K filing with the Securities and Exchange Commission. However, an equity trader said the shareholders were not eager to approve the plan, as they were doubtful that company management was not looking toward the future.

Tembec Inc.'s bonds are "continuing to rally," a trader said. The notes have remained fairly active in an otherwise heavy and inactive market, but the bonds slipped off the day's highs.

Meanwhile, the distressed automotive parts sector is feeling an overall firmness, though traders are still unsure as to why.

Consumer products maker Spectrum Brands Inc. saw its bonds slip a bit. Though there is no fresh news on the company, a trader called the company "a good bankruptcy candidate."

Movie Gallery, Blockbuster up

A plan to increase shares of common and preferred stock was shot down by Movie Gallery's stockholders, but that meant little in terms of movement for the company's bonds.

A trader said the 11% notes due 2012 started the trading day lower at around 83 but edged up slightly to close a half point better at 83.5.

The plan for new shares was an attempt by the company to save its struggling business.

Still, the trader said the plan had really nothing to do with the debt's performance.

"They are in the wrong end of the business," he said, pointing to its competitors' presence in online retail markets. And, he continued, the Dothan, Ala.-based company does not have the time, or money, to break into that area.

"It takes time and hundreds of millions of dollars."

Movie Gallery did acquire MovieBeam, an on-demand video service, but the trader said, "it's not a full-fledged thing."

On the equity side, a trader said, "The idea that this company cannot be 'saved' without new shares is drivel. [There is] lots of revenue, and when expenses are under control this outfit can and should post profits."

The trader also said that the plan as created by company management has shareholders concerned.

Meanwhile, Blockbuster Inc. was called "very strong" by a trader, who added he did not particularly like the name. The 9% notes due 2012 were slated at 98 bid, 99 offered.

The trader said he was leery of the company's bonds, given the amount of competition in the industry - specifically, he mentioned Apple's new iPhone, which would allow users to simply download movies from the internet.

Tembec off of day's highs

Once again, traders reported that Tembec was a name actively quoted, though the bonds fell about a point from the day's highs.

A trader placed the 8 5/8% notes due 2009 at 67 bid, 68 offered, while the 7¾% notes due 2012 were seen around 56 bid, 57 offered. The trader also saw the 8½% notes due 2011 at 57.5 bid, 59 offered.

Another trader pegged the 8 5/8% notes around 67, down from the day's high around 68. He attributed the loss to profit taking near the end of the day.

The first trader said he had not heard any rumor or news that the Canadian forest products company was looking to take out its 8 5/8% paper. However, he said, when things like that start flying around the market, it is "probably somebody reaching out" to the company.

Auto sector mostly firm

In the distressed automotive arena, Dura Automotive Systems Inc.'s bonds stabilized after taking hits earlier in the week. A trader quoted the 8 5/8% notes due 2012 at 59.25 bid, 60.25 offered, down from last week's highs around 66.

Another trader said the credit was "extremely quiet."

The first trader placed Remy International Inc.'s 11% notes due 2009 around 70.5.

"They are just flying along," he said.

At another desk, a trader said Federal-Mogul Corp.'s bonds - which all trade within a point or so of each other - also firmed, trading at par ½ bid, 101 offered.

Delphi Corp.'s 6.55% notes due 2006 "continued to show strength," the trader said, pegging the bonds around the 118 level.

Spectrum Brands slips

Spectrum Brands, the maker of Rayovac batteries, saw its bonds slip about a half point, according to a trader.

The trader quoted the 11¼% notes due 2013 at 94 bid, 95 offered, adding that the debt has fallen about 4 points over the week.

Given the company's highly leveraged balance sheet, the trader called the company a "good bankruptcy candidate."

"It is a good short, actually," he said.

Earlier this year, rumors circulated that the company would default on its debt. The company denied any default worries and shortly thereafter refinanced its bank debt.

Broad market mixed

Technical Olympic USA Inc.'s 10 3/8% notes due 2012 were called down at 77.5 bid, 78.5 offered. A trader said the bonds had previously been straddling 80.

Meanwhile, MedQuest Inc.'s 11 7/8% notes due 2012 were seen "fairly quoted early, then [they] died," according to one trader. He quoted the bonds at 85 bid, 86 offered.

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