Tower bonds extend losses; Dana, Dura paper drop; Fairfax better; Movie Gallery off another point

By Ronda Fears and Sara Rosenberg

Memphis, Sept. 7 - By and large, Thursday's session in the distressed bond market was an extension of previous sessions without any fresh news to move the paper.

Among the big movers (all southerly) was Dana Corp. with selling pressure on TRW Automotive Holdings Corp. cutting its financial outlook as a result of lower production volumes. Tower Automotive, Inc. bonds also were lower, and Dura Automotive Systems Inc. bank paper eased on Thursday.

To the upside, also largely unexplained, Fairfax Financial Holdings Ltd.'s 7 3/8% notes due 2018 were described as about 1 point better on the day at 88 bid, 89 offered. A market source said it appeared to just be more improvement from the sell-off in the bonds earlier this year. There was no fresh news seen out about the Toronto-based financial services company, which received subpoenas from the Securities and Exchange Commission in April, causing its bonds and stock to take a sharp dive.

Dana bonds lose 4 points

But most of the distressed sector in bonds was lower Thursday. One of the biggest declines of the day, on heavy trading action, was a 4-point drop in Dana's 6½% bonds to 76.5 bid, 77.5 offered.

There was no news from Toledo-based Dana, but TRW Automotive, a maker of automotive components like brakes, suspension systems and airbags, cut its 2006 earning outlook Thursday, citing the steep fourth-quarter production cuts at Ford Motor Co., its top customer.

Ford shook up the supply chain group last month when it scaled back fourth-quarter production plans by a whopping 21%, chiefly to pickup and SUV models as demand continues to fall in the face of high gasoline prices.

Dura bank paper sinks

In more from the auto group, Dura Automotive Systems Inc.'s second-lien term loan took a bit of a tumble during Thursday's session as worries over the loan's lien started to infiltrate the market, according to a trader.

The second-lien paper closed the day quoted right around the 98 context, down about a point and a half from previous levels, the trader said.

The drop in trading levels was attributed to investor concerns over the perfection of the lien on the second-lien loan, the trader explained.

Dura Automotive is a Rochester Hills, Mich.-based designer and manufacturer of driver control systems, seating control systems, glass systems, engineered assemblies, structural door modules and exterior trim systems for the automotive industry.

Tower bonds drop 2 points

There was nothing on the broadly distributed newswires about Tower Automotive on Thursday, one sellside source said, although the market was expecting a preliminary look at its reorganization plan.

Still, the 12% bonds due 2013 dropped 2 points to 36.5 bid, 37.5 offered.

Another source said along with nothing getting widely circulated on the bankruptcy plan, news of Novi, Mich.-based Tower Automotive agreeing to classify preferred securityholders as creditors was probably cause for the decline.

"More people are looking for a piece of the pie," he said.

Movie bonds lose support

There was no fresh news in Movie Gallery, Inc., either, on Thursday, but traders said the drop in the bonds was just a follow-through on the blow from news that Amazon.com and Apple Computer Corp. will pursue more movie downloads.

Movie Gallery's 11% of 2012 bonds dropped another point to close Thursday at 64.5 bid, 65.5 offered.

"I missed watching the close yesterday but it looks like the support was taken out. Now, they're pressing this one down harder," a sellside trader said. "It's not good."

Yet, another sellside market source said despite the online competition in movie sales from Amazon and Apple, "brick and mortar will always be around."

"In the jargon of eCommerce, bricks and mortar businesses are companies that have a physical presence and offer face-to-face consumer experiences, as opposed to an internet-only presence," the sellsider said.

"Movie is struggling, yes; however, are they going bankrupt? Is there no way out? Are they saddled with too much debt as to not be serviceable? That is the question that investors want to know," he continued. "Traders on the other hand want to know if there is upside from here, at least short term. If Movie can surprise at next earnings, any positive news, any buyout rumors, this name could fly."

Dothan, Ala.-based Movie Gallery is the second-largest video rental chain in the United States and has suffered against competition from Blockbuster, Inc. as well as Netflix, Inc. in addition to pressure from acquisition of Hollywood Entertainment Corp. last year.

After a surprising second-quarter loss of 47 cents a share last month, however, sources said it was a positive note that the company hired investment bank Merrill Lynch and turnaround and restructuring firm Alvarez & Marsal to help assess its options.

Analyst sees 2007 watershed

Yet, a buyside analyst at a fixed-income fund in New York sees 2007 as the breaking point for Movie Gallery, and early in the year, like January; so, that leaves just about four months left to posture.

"Why is Movie Gallery doomed and going to bankruptcy? The simple answer is a 5% to 6% revenue decline year over year due to market share loss to Netflix, and cost-cutting cannot keep up with earning loss from the revenue decline and increase in interest expense due to a default in debt covenants," the buysider said.

"The trend of revenue decline of 5% to 6% will continue if you follow Movie Gallery's competitors such as Netflix and Blockbuster. Movie Gallery needs to do $72 million cost cutting annually in order to keep the same earnings. You throw in the increase in interest expense and things are getting worse in 2007.

"So far Movie Gallery has been able to save $50 million in the past four quarters by cutting staff and reducing salaries and benefits from the integration of Hollywood. But this is mostly done and there's not much more benefit from this area.

"Movie Gallery hopes to reduce the store floor size to save 15% to 20%, something like $54 to $72 million, beginning in 2007, but most of the benefit will be in 2008. This leaves 2007 the year that Movie Gallery is very likely [to] declare bankruptcy.

"The default in debt covenants on January 2007 is a certainty if you ask me. If Movie can get away from it (big question), there would likely be a hike in interest or some such concession on the $1.1 billion debt. This combined with revenue decline should kill Movie Gallery."

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