Blockbuster bonds lower; Movie Gallery notes slip; Technical Olympic's debt weaker

By Stephanie N. Rotondo

Portland, Ore., Nov. 1 - A falling stock market put pressure on the junk sector Thursday as most names closed weaker on the session.

"You name it, it was lower," said one trader.

"Everything drifted lower with the equity market," said another.

The first trader, however, said he heard some good advice during the day.

"Everyone just needs to calm down and go home," he quipped. "We'll pick it up tomorrow."

When he was reminded that "tomorrow" was Friday - typically a slow day in the bond market - he realized that the new day might not be as great as he had hoped.

But another trader remained upbeat.

"We'll see what happens tomorrow," he said. "It should be interesting."

Poor quarterly results were to blame for Blockbuster Inc.'s couple-point dip in its bonds. Despite measures taken over the quarter, the company posted a wider loss than the third quarter of 2007. Still, the company's new chief executive officer was optimistic, stating in a press release that the company was poised for a turnaround.

Blockbuster's disappointing numbers were felt throughout that sector, as Movie Gallery Inc.'s bonds were also lower on the day, as well as its bank debt. But as one trader noted, "it is a tough sector."

Meanwhile, traders were scratching their heads trying to figure out why Technical Olympic USA Inc.'s bonds fell another 5 points on the day. With no fresh news out, the market wondered if asset sales were not going as planned or if some investors were disappointed that a bankruptcy filing had not yet occurred.

Blockbuster debt dips

Blockbuster's bonds slipped after the company released its third-quarter results.

A trader quoted the 9% notes due 2012 at 88.5 bid, 89.5 offered. The bonds had been holding steady in the 89 bid, 90 offered context.

Another trader said the bonds were "very active," closing at 88 bid, 89 offered.

"I thought that [the] numbers would not necessarily be great," the trader remarked. "It's a tough industry."

The trader added that he figured the market would have expected the numbers to be down, noting there were "no positive surprises," which could have been why the bonds fell.

At another desk, the 9% notes were pegged at 88.5 bid, 89.5 offered, down nearly 2 points. Another trader saw the Blockbuster bonds off 1.25 points at 88.5 bid, 89.5 offered, while a market source said the debt got as low as 87.5 bid, 89 offered, down 1.5 points on the day, in early dealings, before coming off those lows to finish around 89, still down 1.25 points.

The Dallas-based movie rental chain posted a net loss of $35 million for the third quarter of 2007, compared to a net loss of $24.7 million for the same period the previous year. Total revenues fell 5.7% to $1.24 billion.

In a press release, the company said it was making "efforts to improve profitability," which includes cutting overhead and modifying its online subscription program.

Movie Gallery notes slip

Elsewhere, Movie Gallery's bonds were weighed down by Blockbuster's poor earnings report.

A trader placed the bonds, which have been holding steady in the 28 bid, 30 offered range, at 26 bid, 27 offered. Another trader called the bonds unchanged at 28 bid, 30 offered, while another said the bonds lost 4 points on the bid side at 26, but no offer.

Movie Gallery's first-lien term loan was also lower, dropping to 87¾ bid, 88¾ offered from 88½ bid, 89½ offered, according to a trader.

When asked whether the movement had anything to do with Blockbuster's release of disappointing third-quarter numbers, the trader responded, "I don't think it has to do with Blockbuster. There's been no news on the public side and no news is bad news."

Tousa bonds bomb

Traders were wondering what it was exactly that pushed Technical Olympic's bonds down another 5 points on the day.

Theories ranged from trouble in asset sales to disappointment that the homebuilder would not be filing bankruptcy soon.

A trader pegged the 9% notes due 2010 at 48 bid, 50 offered and the 8¼% notes due 2011 at 48.5 bid, 50.5 offered. He said the subordinated issues were also weaker, the 7½% notes due 2011 and 2015 at 9 bid, 11 offered and the 10 3/8% notes due 2012 at 10 bid, 12 offered.

Another trader saw the 9% notes closing at 49 bid, 51 offered and the 8¼% notes at 50 bid, 51 offered. He placed both the 7½% issues at 8 bid, 10 offered, as well as the 10 3/8% notes.

At another desk, a trader quoted the 9% notes at 49 bid, 51 offered, while the 10 3/8% notes dipped to 11 bid, 12 offered. He said the 2015 paper ended the day at 9.5 bid, 11.5 offered.

There has to be something driving it, like folks know how bad numbers are or they have all their assets for sale and no one wants to buy them," a trader said, noting that there was no news out to prompt the move. "If they were in a fire sale mood, that would not be good for bonds."

"It could be the asset sale effort [is] getting [a] lousy response - the most likely scenario," said another trader. "Also, the bank debt reprieve may have bought them more time, inducing selling of holders who are disappointed that the imminent filing may take longer to happen."

"The bank debt and the second-lien paper getting 'perfected' has some legs to it," the first trader said. "But something else causes this kind of drop."

"I think now that the preference issue has been put to rest for the banks, they are not going to hold up a bankruptcy filing and that's where we see this heading," the trader continued, "and sooner than later."

"I think people are worried about asset sales," said another source. "A bankruptcy filing is coming soon and recoveries should be lower than current levels."

The source said he believes the company will file before the end of the year and recoveries in the senior debt will likely be in the 30 to 40 range - still about 20 to 25 points from its current levels.

"The bonds have to hit the mid-20s to be appropriately priced," he opined.

Just a few months back, the market believed that, should Technical Olympic go under, they had enough assets to cover the majority of its debt. Now, the tables have turned.

"It depends on which debt you are talking about," a trader said. "I think the bank debt and senior debt are probably OK. The sub debt is sketchy, but it depends on many variables - many balls in the air."

Elsewhere in the sector, a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 at 81.5 bid, 82 offered versus 82 bid, 83 on Wednesday.

He quoted Standard Pacific Corp.'s 7% notes due 2015 down half a point at 73 bid, 75 offered, while WCI Communities Inc.'s 9 1/8% notes due 2012 fell 4 points to 74 bid, 76 offered.

Broad market bits

Delphi Corp.'s bonds retreated again, following the general tone of the overall market, a trader said.

The trader deemed the 7 1/8% notes due 2029 lower by 1 to 2 points at 88 bid, 89 offered and the 6.55% notes that were to have matured last year at 88 bid, 89 offered.

The trader also noted that Dura Automotive Systems Inc.'s 8 5/8% senior notes due 2012 remained active in the high-30s.

Despite better-than-expected quarterly numbers, Trump Entertainment Resorts Inc.'s bonds were slightly weaker to unchanged. A trader said the 8½% notes due 2015 came off the day's highs to close unchanged around 85. The casino operator posted a net income of $6.6 million.

Realogy Corp.'s bonds were called 3 points lower across the board, pressured by activity in the broad real estate market. A trader - who dubbed the name the "disaster du jour" - quoted the 12 3/8% notes due 2015 at 69 bid, 71 offered and the 10½% notes due 2014 at 80 bid, 82 offered.

Calpine Corp.'s 8½% notes due 2011 fell 2 points to 115 bid, 115.75 offered from 117 bid, 118 offered.

A trader saw 155 East Tropicana LLC's - a.k.a. Hooters - 8¾% notes due 2012 catching a 104 bid, but he had "no idea why."

Sara Rosenberg contributed to this article.

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