WCI Communities weaker; Movie Gallery, Blockbuster drop; Swift Transportation dives

By Stephanie N. Rotondo

Portland, Ore., July 26 - The broad financial markets took a hefty downturn Thursday as investors continued to back off, resulting in major moves in the distressed bond market.

Lack of investor confidence coupled with more lending worries and poor quarterly results meant many names dropped 10 or more points on the session. Traders said many are moving toward higher-priced credits with more liquidity, but even they were not immune from the day's tumble.

Power producer Calpine Corp., for instance, saw its 8½% notes due 2011 slide to 110 bid, 111 offered from the previous day's levels around 125.

"It was unbelievable," a trader said of the day's activity. "A majority of credits were down."

"Everything was down," another trader said. However, "there did not seem to be a lot of bids."

Still, the market's plunge is not entirely unexpected.

"It was just a matter a time," the first trader said. "Things are way too tight; something had to give."

WCI Communities Inc. was one of several companies that got whacked on the day, further pushed down by disappointing industry news.

The homebuilder's bonds were not helped by the news that the company had not found a buyer, prompting a loss of as much as 7 points. The company had previously rejected a bid from billionaire investor Carl Icahn at $22 per share, believing it could get more. However, the stock closed the day down $1.45, or 12.81%, to $9.87 - less than half of Icahn's bid.

"Housing numbers were again poor today and [homebuilders] all went down a bunch," a trader said. "Merrill Lynch came out and said lack of financing will slow down the private equity market and the general market will sell off as a result."

In the entertainment sector, Movie Gallery Inc.'s bonds and bank debt continued to freefall, with the notes dropping as much as 10 points.

The Dothan, Ala.-based movie rental chain's debt was initially seen weakening after rival Blockbuster Inc. reported its quarterly results. According to one trader, that got the ball rolling - then the equity market started its slide.

Swift Transportation Co., Inc.'s newer issue also was beaten up in the market crunch. Saint Corp. acquired the trucking transportation company based in Phoenix in a leveraged buyout earlier this year.

As the trading day came to a close, traders were already looking toward the next session.

"We will just have to see what the follow through is tomorrow," a trader said. "It is what folks have been talking about - the rubber band was wound too tight."

WCI weaker

Homebuilder WCI Communities entered a "death spiral," a trader said, as its bonds dropped by up to 7 points on the news that the company had not found a buyer.

A trader pegged the 9 1/8% notes due 2012 off 6.25 points while another saw the notes fall about 5 points. Yet another claimed the bonds slipped 7 points to the 83 area.

In a statement issued Thursday, the company said that several companies were initially interested in purchasing the builder. However, given market conditions, many backed away.

But WCI is just one of many homebuilders that have experienced troubles in light of a deteriorating housing market. Even larger builders, such as D.R. Horton Inc., are facing hard times. Horton, the second-largest homebuilder in the United States, posted a net loss of $823.8 million, while Beazer Homes USA Inc. - a company that has been in the midst of a fraud investigation linked to tactics for obtaining subprime mortgages - showed a loss of $123 million.

A trader said he was not surprised that WCI did not find a buyer, but "apparently it was to some people."

"We don't see a happy outcome for investors without the sale of the company, and there is no assurance that a deal will happen soon, or at all," wrote Vicki Bryan, an analyst with Gimme Credit LLC.

"[They] should have taken the Icahn bid," another trader said.

Meanwhile, activity in Technical Olympic USA Inc.'s bonds died down as investors focused their attention on the floundering WCI. A trader said he saw the 10 3/8% notes due 2012 quoted just once early in the day at 60 bid, 62 offered.

Movie Gallery, Blockbuster drop

Movie Gallery's bonds, which have been in a perpetual slide since last week, dropped considerably during the session, pressured by poor second-quarter results from rival Blockbuster.

A market source pegged the 11% notes due 2012 around 15.5, while at another desk, a trader quoted the bonds at 15 bid, 17 offered, which he called down about 10 points. He noted that the bonds opened around 23 bid, 25 offered. Another trader saw the notes around 16, down just 5 points.

"The Blockbuster news got it going initially," the third trader said, citing news that its rival had posted a loss for the second quarter of 2007. "When the equity market started going ... it bottomed out."

The trader added that even the company's bank debt had come off, calling the first-lien term loan 83 bid, 87 offered.

Another trader saw the loan at 85 bid, 87 offered, down from 88 bid, 90 offered.

Early in the session, Blockbuster announced second-quarter financial results that included a net loss of $35.3 million, or $0.20 per common share, as compared with net income of $68.4 million, or $0.31 per diluted common share, for the second quarter of 2006.

Total revenues decreased 2.8% to $1.26 billion for the quarter from $1.3 billion for the second quarter of 2006.

The Dallas-based provider of in-home movies and game entertainment saw its operating loss total $13.7 million, compared with an operating loss of $2.1 million for the same period last year.

Cash flow used for operating activities widened to $40.3 million from cash used of $23.3 million last year.

And, free cash flow decreased $20.8 million to a negative $59.8 million from a negative $39 million.

Still, Blockbuster's bonds attempted to rebound during the session, a trader said, after the initial drop spurred by the news.

The trader saw the 9% notes due 2012 at 80 bid, 81 offered, adding that the bonds had fallen "down into the 70s" in early trading. He said that the debt was "fairly traded" toward the open but then activity died down a bit.

Swift dives

Trucking transportation company Swift saw its bonds weighed down with market pressure during the session, but it was noted that the new issue has been in decline since its release.

The 12½% notes due 2017 were "fairly traded" at 67 bid, 68 offered, a trader said, while another quoted the bonds around 67. He added that the bonds closed the previous session around 76 and opened the day at 71 bid, 73 offered, calling the debt down 10 points.

The first trader said he had not heard anything specific on the company to account for the loss, but noted that the trucking industry has been hit hard of late, attributed to rising fuel costs.

Retailers slip

Linens n'Things floating-rate notes hit "a new low," a trader said, pegging the bonds around 63.

Another trader saw the notes at 61 bid, 63 offered.

The first trader also saw Claire's Stores Inc.'s 10½% notes due 2017 around 80, down from the previous day's levels of 83 bid, 85 offered. The 9 5/8% notes due 2015 were called down "3 points at least" at 81.5 bid, 82.5 offered.

The trader said market pressure was partly to blame for the retailers' losses, but was partly because "these are the worst names."

"People that are in them are trying to get out," he said.

Autos mostly down

The distressed automotive parts arena got knocked around in line with the overall market, a trader said, with Delphi Corp.'s bonds leading the pack.

The trader said the 6½% notes due 2011 fell to around 110, after closing the previous session around 126. He noted that the slide could be partly attributed to a struggling Chrysler Corp. bank deal.

Dura Automotive Systems Inc.'s bonds were mixed during trading, with the 9% notes due 2009 remaining unchanged at 3.5 bid, 4.5 offered. The 8 5/8% senior notes due 2012, however, were deemed down at least 5 points at 56 bid, 57 offered.

Elsewhere, Dana Corp.'s debt was also weaker, with the 5.85% notes due 2015 at 92 bid, 93 offered and the 6½% notes due 2008 at 97 bid, 99 offered.

Broad market mixed

A market source saw James River Coal Co.'s 9 3/8% notes due 2012 at 75 bid, 80 offered, while a trader said the bonds rebounded off the day's lows to close at 78 bid, 80 offered.

Tembec Inc.'s 8½% notes due 2011 were called weaker at 41 bid, 43 offered.

Sara Rosenberg contributed to this article.

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