Hollywood bonds tumble as buyout deal stumbles; MCI firms again

By Paul Deckelman and Paul A. Harris

New York, Aug. 6 - Nobody in the junk bond market, or the equity market, for that matter-except perhaps for the short-sellers - was singing "Hooray For Hollywood" on Friday, as Hollywood Entertainment Corp.'s securities nosedived on the news that the planned leveraged buyout of the Portland, Ore.-based video rental chain is now unlikely to take place.

On the upside, MCI Corp. bonds were seen up for a second consecutive session, after the Ashburn Va.-based long-distance carrier's announcement Thursday that it was doing well enough that it had excess cash of $2.2 billion and would begin paying out 40 cents a share quarterly as a dividend beginning Sept. 15. Also up was Rite-Aid Corp., which announced a successful new bank financing.

As primary market sources anticipated on Thursday, Friday's session produced anemic numbers for job growth in the United States. However no one on Thursday indicated that the July increase, 36,000 jobs, would come so far below economists' 200,000 job expectations.

The weak numbers triggered a sizable fall in stock prices - a phenomenon which, according to one source Friday, never helps to whet investors' appetites for junk bonds.

Nevertheless one issuer, AMC Entertainment Inc., did manage to price $625 million in three tranches, which turned out to be the only primary action on Friday. The Kansas City, Mo.-based movie theater operator's new bonds were heard by traders to have firmed smartly in aftermarket dealings.

AMC completes three tranches

AMC's $625 million raised on Friday was a sizable portion of the approximately $2 billion price of the LBO deal through which the company will be acquired by affiliates of J.P. Morgan Partners and affiliates of Apollo Management, LP.

At the operating company level Marquee Inc. issued an upsized $250 million of eight-year senior notes (B2/B-) at par to yield 8 5/8%. Price talk was 8 3/8%-8 5/8%. The issue was increased from $150 million.

Marquee Inc. also priced a downsized $205 million of seven-year senior floating-rate notes (B2/B-) at par to yield three-month Libor plus 425 basis points. Price talk was Libor plus 425 basis points.

The floating-rate tranche was decreased from $305 million, and the first call premium, which comes into play after Aug. 15, 2006, was increased to 103 from 102.

Meanwhile at the holding company level Marquee Holdings Inc. sold $304 million of 10-year senior discount notes (Caa1/CCC+) at 55.894 to yield 12%. Price talk was 11½%-11¾%. The discount notes sale generated $170 million of proceeds.

JP Morgan and Citigroup ran the books.

Euro drive-by

The new issue calendar took aboard one deal as the first week of August 2004 came to a close.

Price talk of 6%-6 1/8% emerged Friday on Crown European Holdings SA's €460 million of seven-year first priority senior secured notes (Ba3/BB).

Investor presentations for the quick-to-market deal, via Citigroup, will take place in London only, with pricing is expected to take place on Tuesday.

The European subsidiary of Philadelphia, Pa.-based packaging products supplier Crown Holdings will use the proceeds to repay bank debt.

Bad numbers unlikely to deter Fed, says Keefe

Prospect News caught up Friday with Pax World High Yield Fund portfolio manager Diane Keefe, just as she was on the way out the door to take in the Blockbuster roadshow.

Noting that equities were already taking a sound beating after the dismal July jobs numbers, Keefe continued to express skepticism as to whether a fundamental improvement has taken place in the U.S. economy, a position she has taken all year in conversations with Prospect News.

Nevertheless, woeful numbers and falling stock prices notwithstanding, Keefe predicted that Tuesday's Federal Reserve Federal Open Market Committee Meeting will produce an increase in the short-term interest rate of 25 basis points.

"I think that if Greenspan continues to see weak numbers he won't do anything after that for a while. Or he might just do quarter-point increases all along.

"But people were assuming there were going to be 50 basis point increases in here. And I think with numbers like this he's going to definitely back off of that."

Keefe said that Greenspan's remarks before the U.S. Congress that the weak economic numbers in June amounted to "a speed bump" on an otherwise steady road to growth in the economy put added pressure on the Fed to continue to increase rates, regardless of Friday's figures.

"I think that the bottom line is that businesses are recovering but jobs are not right now," she said.

Shopping Blockbuster, Century

As to the Blockbuster Inc. deal that Keefe mentioned - a $300 million offering of eight-year senior subordinated notes set to price this coming week via JP Morgan, Credit Suisse First Boston and Citigroup - Keefe simply commented: "My kids and I are still big Blockbuster customers on the weekends."

Shortly after she rang off Standard & Poor's announced that it had assigned its B+ rating to the offering.

Keefe also mentioned that her analyst would attend Century Aluminum Co.'s roadshow, noting that the Monterey, Calif. company passed the social issues screens to which the Pax World Funds submits all companies in which it invests.

Century Aluminum is in the market with $250 million of 10-year senior notes via Credit Suisse First Boston, Banc of America Securities, Goldman Sachs and JP Morgan.

Like Blockbuster, the deal is expected to price this week.

AMC up in trading

When the new AMC 8 5/8% senior notes due 2012 were freed for secondary dealings they were seen having firmed to 102 bid, 102.5 offered from their par issue price - the same level to which the company's new floating-rate senior notes due 2011 moved up to, also from a par issue price.

AMC's new zero-coupon/12% senior discount notes due 2014 meanwhile rose to 58 bid, 58.75 offered, well up from their 55.894 issue price earlier in the session.

Hollywood financing doubtful

While the financing for the planned leveraged buyout of theater owner AMC - of which the bond deal is a major component - seems to be falling into place, the financing for the LBO of another movie-related company, Hollywood Entertainment, merely seems to be falling apart.

Hollywood said Friday that it had been informed that Leonard Green & Partners, LP now believes that the financing condition to the consummation of the merger between the two companies will not be satisfied due to "industry and market conditions."

Los Angles-based buyout operator Green - an affiliate of Carso Holdings Corp. - had offered to take Hollywood private in an $890 million buyout transaction announced March 29. Hollywood shareholders would receive $14 a share, a 31% premium over the stock's closing price of $10.70 the day before.

The 1,800 store chain has been facing a slowing rental market and trying to fend off larger rival Blockbuster, which has also been hurt by the industry downturn.

While Hollywood did not definitively say that the Green deal is dead, it did say in its statement that it was "considering Hollywood's alternatives to determine the course of action that would be in the best interests of Hollywood's shareholders. There is no assurance that a merger with [Leonard Green] will be completed, or if completed, that it would be completed on terms that do not differ materially from those in the merger agreement."

News that the deal seem to be coming undone knocked Hollywood's 9 5/8% notes due 2011 down sharply. A trader said the bonds, like the Green merger, were "falling apart, dropping to an offered level at 108, with "no left hand [i.e. bid]," from prior levels around 113-114.

A market source at another desk saw an even more pronounced slide, with the bonds going home bid at 103, down 10.5 points from their pre-news levels.

Hollywood's Nasdaq-traded shares, meantime, dropped $2.98 (23.30%) to $9.81, on volume of some 12.7 million shares - more than 20 times the usual daily turnover.

MCI's cash pile

While Hollywood was going down down down, traders saw MCI continuing to go up up up.

"Even with their top line declining" as the whole long-distance industry shrinks and having posted a $71 million (22 cents per share) second-quarter loss, "they've got this huge cash balance" which made Thursday's announcement of the dividend possible, said a trader.

He saw the MCI bonds unchanged on the day - but holding firm at the higher levels to which they had risen on Thursday, with the company's 5.908% notes due 2007 at 97.5 bid, 98.5 offered, its 6.688% notes due 2009 at 92 bid, 93 offered, and its 7.735% notes due 2014 at 90 bid, 91 offered.

It should be noted that the loss actually represents an improvement from the year-ago results of a $388 million loss ($1.19 a share).

While dividends are generally not something that bondholders wish to see - preferring to have excess cash funneled into debt reduction, there seemed to be a sense that MCI bondholders could live with this one since it will cost the company a mere $128 million a quarter and would have to be approved on a quarter-to-quarter basis.

MCI's big cash cushion comes from its time spent in Chapter 11, up until its emergence several months ago, during which time it was able to accumulate cash, because it was not paying interest on its bonds.

"Right out of the gate, it was all MCI," said another trader, "with an awful lot of trading going on in the morning."

He said that the bonds "traded up," on top of Thursday's gains. He saw the three-year notes at 97.5 bid, 98 offered, the five-years at 93.5 bid, 94 offered, and the 10-years at 91 bid, 91.5 offered.

Another trader said most of the gains the MCI bonds have posted over the past two sessions "came [Thursday] night, when they announced the dividend and the results, and the bonds moved up.

"They were a little more active [Friday]," he said, "and showed some follow-through during the day" after Thursday's advance. He saw the bonds pushing up to around the same levels that the other traders did.

Rite Aid better

Also higher Friday was Rite Aid Corp. after the Camp Hill, Pa.-based drugstore chain operator said that it had arranged new and amended credit facilities totaling $1.75 billion to replace $1.85 billion of existing bank debt. Rite Aid said that the new facilities would cut its borrowing costs and reduce the company's overall debt.

Rite Aid's 6 7/8% notes due 2013 were at 91.5 bid, 92.5 offered, "up maybe a point," a trader said, as were its 2005 and 2007 notes, both at 101.5 bid, 102.5 offered.

A market source quoted the company's 6 1/8% notes due 2008 up half a point at 95 bid, while its 9½% notes due 2011 were a full point higher at 110.75 bid and the 6 7/8s were 92 bid, up from 91.25.

Williams Cos. Inc.'s bonds were better, a day after the Tulsa, Okla.-based pipeline operator announced plans to tender for any and all of its $800 million of outstanding 8 5/8% senior notes due 2010.

Those particular bonds were about three-quarters of a point better at 117.25, expected to be the likely takeout level when the tender price is set, a market observer said.

He also saw the Williams 8 1/8% notes due 2012 half a point better at 112.5 bid.

On the longer end, Williams' 8¾% notes due 2032 were seen a point-and-a-half better, around 108.

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