Movie Gallery off again as new covenant problems feared; Calpine rise tops out

By Paul Deckelman and Sara Rosenberg

New York, March 24 - Move Gallery Inc.'s term loan softened up in trading and its bonds continued to slide Friday after the troubled Dothan, Ala.-based video rental chain operator revealed that it has found material weaknesses in its internal controls over financial reporting - and warned that it anticipates facing more financial covenant compliance problems barely more than a week after its lenders eased the terms on its loan package.

Elsewhere, the "Calpine rising" mystery may now be history as the sudden and - market participants agree - baffling recent rise in the battered bonds of troubled San Jose, Calif.-based power generating company Calpine Corp. came to an end, at least for now.

Little was seen going on in the automotive sphere other than some more profit-taking off recent gains in the bonds of such problem-plagued auto components suppliers as Dana Corp. and Delphi Corp.

Movie Gallery's term loan closed out Friday's session quoted at 89.75 bid, 90.75 offered, down a quarter-point from Thursday's closing levels of 90 bid, 91 offered, a bank debt trader said.

A trader in distressed notes meantime saw the company's 11% notes due 2012 fall from Thursday's closing level at 46 bid, 48 offered, all the way down to 41 bid, 43 offered, before bouncing part of the way back to finish the day and the week at 44 bid, 46 offered.

It should be noted that the bonds had ended the previous week on March 17 at around 54 bid, 56 offered - a 10 point plunge.

Another trader saw the bonds end Friday at 45.5 bid, which he called down ¾ point on the day, but allowed that the bonds had been lower than that in intra-day dealings.

Yet another trader also saw the bonds ending in a 44-45 context , which he called down two points after having cratered earlier in the session at 41-42 in the morning.

On Friday, the company announced in a 10-K filed with the Securities and Exchange Commission that four material weaknesses in its internal controls have been identified - ineffective management review of account analyses and reconciliations, ineffective communication of accounting policy for capitalizing costs and lack of effective review process, inaccurate or lack of timely updating of accounting inputs for key estimates and assumptions, and ineffective procurement and receiving processes.

As a result of these reporting deficiencies, the company warned that investor confidence in the reliability of its financial statements could diminish, which ultimately could negatively impact market prices for its securities.

In addition, Movie Gallery also revealed in its 10-K that it may not be able to comply with some financial covenants for the first quarter of 2007 without further amendments to its credit facility.

The facility was just amended on March 15 to relax certain financial covenants, including the leverage ratio, fixed charge coverage ratio and interest coverage ratio; however these covenants get stricter once first quarter 2007 rolls around.

Beginning with the first quarter of 2007, the allowable leverage ratio measuring debt versus earnings drops to 2.25x from the comparatively easy 6.5x standard in fourth quarter 2006. The fixed charge coverage ratio goes up to 1.10x from the 1.00x requirement in fourth quarter 2006, and the interest coverage ratio moves to 3.00x from the 1.45x requirement in fourth quarter 2006.

Movie Gallery went on to say that it is in the process of exploring strategic alternatives to avoid future non-compliance, such as operational improvements, raising additional equity, divesting non-core assets and sale/leaseback transactions.

Friday was not the first day this past week that the term loan experienced some pressure in trading. On Monday, the paper dropped to 92 bid, 93 offered from 93 bid, 94 offered, on no particular news.

Then on Tuesday, the loan dropped to 91 bid, 92 offered as uninspiring preliminary 2006 financials surfaced. On Wednesday levels pretty much stayed status quo - but once fourth-quarter and full-year financials were announced on Thursday, the bank debt receded to the 90 bid, 91 offered context.

For the fourth quarter of 2005, the company reported total revenues of $676.4 million, compared to $208.4 million last year, and a net loss of $546.5 million, or $17.25 per share, compared to a gain of $11.4 million last year, or $0.36 per diluted share.

For fiscal 2005, Movie Gallery's revenues totaled $2 billion, compared to $791 million for 2004, and net loss totaled $552.7 million, or $17.53 per share, compared to a gain of $49.5 million, or $1.52 per diluted share, last year.

Calpine rise halts

Elsewhere, Calpine's bonds were being quoted either unchanged or, at some desks, lower - the first time that has happened after several sessions in which most traders had seen the bankrupt utility's bonds higher, but had no idea why anybody would want to buy that paper at this early point in what promises to be a lengthy and contentious restructuring process.

A trader who saw the company's 8¾% notes due 2007 fall 1½ points to 57 bid, 59 offered, opined that Calpine "has dropped as mysteriously as it was going up the other day." He said he had not a clue as to what had been behind the rise.

Neither did anyone else. At one point on Thursday, a trader at another desk had seen those 8¾% notes get as high as 59 bid from lows in the lower 50s. Other Calpine bonds had been seen going up three or four points on the session, all with no news capable of moving a market like that having been seen.

On Friday, another market source called Calpine's 8 5/8% notes due 2010 and 8½% notes due 2011 each down 1½ points at 33.5 bid.

The fall-off was less among company bonds secured by liens against assets; the 8½% notes due 2010 were ¼ point lower at 92.75 bid.

Auto sector quiet to weak

The auto names fell pretty quiet after a volatile week characterized by much news out of General Motors Corp.; GM's benchmark 8 3/8% notes due 2033 were steady at 73.25 bid, 74 offered.

But while one trader said the whole sector was "doing nothing" - he quoted Delphi's bonds at 66.5 bid, 67 offered, and Visteon Corp.'s 8¼% notes due 2010 at 81.5 bid, 82 offered, both unchanged - a source at another desk pronounced Dana and Dura Automotive Systems Inc.'s as the day's weak players.

He saw bankrupt Toledo, Ohio-based components maker Dana's 6½% notes due 2009 at 80.75 bid, down from 82 previously, and saw its 5.85% notes due 2015 at 76, off from 77.75.

Dana's bonds had previously been riding a rocket, firming for some two weeks after its March 3 Chapter 11 filing on technical concerns, such as the demand for bonds to meet settlement requirements on some credit default swaps contracts, as well as on investor optimism that Dana bondholders might get recoveries nearing par because of the company's strong portfolio of assets that could cover its obligations. After a pause for several sessions, the bonds rose at mid-week as Dana launched its billion-dollar-plus debtor-in-possession financing effort, telling its lenders optimistic scenarios for Dana refocusing its operations.

The source also saw the non-bankrupt Rochester Hills, Minn.-based supplier Dura's 9% notes due 2009 down a point at 48.5. However, he also noted that its 8 5/8% notes due 2012 were at 82 bid, up more than a point on the day.

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