Movie Gallery bank debt bonds, keep falling; Charter up selectively on debt-exchange offer

By Paul Deckelman and Sara Rosenberg

New York, Aug. 11 - Movie Gallery Inc.'s term loan B continued to slide in Friday's session, along with its bonds and stock, getting clobbered for a second straight day, traders said, on negative investor reaction to its release Thursday of disappointing second-quarter results.

Elsewhere, Charter Communications Inc.'s notes issued from 2009 through 2012 were seen having firmed smartly, as the St. Louis-based cable operator announced an offer to exchange new, longer-maturity debt for those bonds. Charter's 5 7/8% convertible notes due 2009 were also higher on a separately announced offer to exchange some of those securities for cash, stock and a longer-dated note.

However, Charter bonds not included in the exchange offers were not seen having joined the rise.

On the automotive front, Collins & Aikman's badly battered bank debt was seen having picked up a little from the lows it hit during the week. But the bankrupt Troy, Mich.-based automotive interior component maker's junk bonds continued to erode away.

Movie Gallery's term loan B closed out the day quoted at 94 bid, 95 offered after trading as low as 94, a trader in that market said. By comparison, on Thursday the bank debt had closed out the day at 95.5 bid, 96.5 offered, according to one trader, and at 96.25 bid, 96.75 offered, according to a second trader. Immediately prior to the release of numbers on Thursday, the loan had been quoted at 97.125 bid, 97.625 offered.

Movie Gallery's 11% notes due 2012 fell to 61.5 bid, 63.5 offered, a trader said, from opening levels around 68, where the bonds had settled after Thursday's carnage, which saw those bonds tumble some 12 points into the upper 60s from prior levels around 80. "They just kept going down," he marveled. "It was pretty ugly."

Another trader saw them ending even lower, at about 60 bid, 61 offered, which he called down 7 points on the session and down 20 points from the levels around 80 to which those bonds had risen on Wednesday, in anticipation of what marketeers thought would be strong numbers.

But Movie Gallery threw Wall Street for a loop Thursday, when it reported a wider net loss of $14.9 million (47 cents per diluted share) versus the year-earlier deficit of $12.2 million (39 cents per share) - a far cry from the solid profits that most Movie Gallery-watchers had been expecting from the Dothan, Ala.-based video rental chain operator.

Other second quarter results included total revenues of $601.3 million as compared to $504.7 million in the comparable period last year, reflecting the impact of Movie Gallery's acquisition last year of Hollywood Entertainment, which made it the second-biggest video rental operator in the nation, after Dallas-based Blockbuster Inc. It also posted adjusted EBITDA of $57.6 million.

Also causing investors to give the company poor reviews was the announcement Thursday that it had hired restructuring specialist Alvarez & Marsal, along with Merrill Lynch & Co., to advise Movie Gallery on how to improve its capital structure and operations. That drastic step sparked worries about whether the company could continue to live up to the provisions of its bond indentures and credit facility covenants - even though the company said it liquidity was adequate and it expects to remain in compliance with all of its obligations for at least the remainder of the current 2006 fiscal year.

Movie Gallery's Nasdaq-traded shares - which on Thursday lost more than half of their value on eight times their normal volume level - continued their freefall on Friday, falling another 47 cents (15.82%) to $2.50 on volume of 5.2 million shares, nearly double the average daily handle.

Winn-Dixie loses

Also on the downside Friday, a trader in distressed notes saw Winn-Dixie Stores Inc.'s notes "a little lower," quoting the bankrupt Jacksonville, Fla.-based supermarket operator's 8 7/8% notes due 2008 at 78 bid, 80 offered, a drop of a point or two.

"There was not a lot of activity in the credit," he said. "It was thinly traded."

Airlines slightly weaker

The trader saw airline issues "moving around a little bit," as the financial markets continued to come to grips with Thursday's alarming news out of London about the discovery by authorities of a terrorist plot to blow up a number of airliners in mid-flight. That caused such airline names as the bankrupt Delta Air Lines Inc., and Northwest Airlines Corp. to lose a little on Thursday.

On Friday, the trader said, Delta's bonds were seeing "higher quotes," with the Atlanta-based Number-Three U.S. carrier's 10% notes due 2008 and 7.90% notes due 2009 in the 23-24 area and its 8.30% notes due 2029 were around 23.5-24.5. However, he said, "there was not much activity" in the bonds.

He also quoted the bonds of Eagan, Minn.-based Number-Four carrier Northwest as probably half a point to a full point lower on the day. He saw Northwest's 10% notes due 2009 were at 46 bid, 47 offered, as were its 7 7/8% notes due 2008. Its 8.70% notes were at 47 bid, 48 offer, all down half a point to a point, the trader said.

Some Charter bonds gain, some lost

Elsewhere, Charter Communications bonds that are included in the company's announced debt-for-debt offer that would give the holders of those bonds $875 million in principal amount

of longer-dated notes - up to $200 million of 10¼% senior notes due 2013 and up to $675 million of 11% senior secured notes due 2015 (see related story elsewhere in this issue) were seen to have pushed up several points, a trader said, quoting one such issue, the 8 5/8% notes due 2009, as having moved up to 88 bid, 89 offered from prior levels at 84 bid, 85 offered.

But the senior bonds not included in the offer "didn't do so well," he said, seeing Charter's 11% notes due 2015 - outside of the 2009 through 2012 group of notes the company seeks to take out via the exchange - down 2 points on the session to end at 88 bid,. 89 offered.

Another market source saw Charter's 10% notes due 2009 having advanced to 89.25 bid, well up from around 85 before the news of the debt-for-debt exchange was released. Its 10% notes due 2011 rose as high as 73 bid, and then finally settled in at 70 bid, up from the pre-news 67.75, while its 10¾% notes due 2009 were 3 points better at 89 bid.

Charter Communications' 5.875% convertible due 2009 climbed about 5 points outright after the company offered cash, stock and a longer-dated straight note for part of the series.

The convertible was quoted at 85.25 bid, 85.75 offered early Friday against the previous closing stock price of $1.21, about 4 points better outright than closing levels the day before versus the same stock price. The convertible reached as high as 87.5 on Friday, while Charter stock (Nasdaq: CHTR) rose 10.74% or 13 cents to close at $1.34.

"Is it good for the convert guys? Hell, yeah!" a convertible trader said of the offer.

Charter on Friday offered $417.75 in cash, 100 shares of its class A common stock and $325 in principal amount of added-on 10¼% senior notes due 2010 for every $1,000 in principal amount of its 5.875% convertible. At current share prices and the 10.25% senior note's market value of 101, the exchange package is worth around $880 per $1,000 of the 5.875% convertible note.

The offer is only good for up to $450 million, or 52.17%, of the $862.5 million outstanding in the 5.875% convertible series, and will be pro-rated if the company receives acceptances above that limit.

Charter said the exchange offers were aimed at extending the maturity of its debts and reducing overall indebtedness. The 5 7/8% convertible is its earliest-maturing debt security.

"That would seem like a reasonable discount," a convertible bond trader said of the offer. "That's probably still attractive even now [at the 5.875% convertible's current levels]."

The trader said it made sense for holders of the convertible to take the offer.

"It's [Charter] a risky play," the trader said. "If you have the convertible, you're thinking about it all the time, and now you can get some money back and you can push it back one year, of course you take it."

"When you get a kiss like that, you take it," the trader said.

A sellside convertible bond analyst said the deal seemed fair and "people are pretty much going to go along with it."

Addressing the convertible debt was something the company was bound to do because of concerns about its liquidity, the analyst said.

"Either way the quality of the convertible outstanding is going to get worse," the analyst said. "But this way you get at least some of it back in cash."

"Certainly the converts are very risky credit," the analyst noted. "There's not much in the way of available liquidity, and there's concern about whether there's going to be cash to handle the bonds. This is definitely something that's positive for them to address."

But the quality of the convertible that's left after the exchange is going to be worse, the analyst warned.

"The private exchange offer and the movement of the interest that they have in certain [subsidiary] operating systems, by moving that [other debt] up to a more senior level, the position of the convert holders are going to get worse with the new structure," the analyst said.

Collins & Aikman loan gains

Apart from Charter, Collins & Aikman Corp.'s bank debt felt a bit better during Friday's session after spending all week in a downward spiral, according to a trader.

The pro rata debt closed out the day quoted at 61 bid, 63 offered, up from Thursday's closing levels of 58 bid, 62 offered, the trader said.

However, over the course of the entire week, the pro rata debt lost a total of 12 points when compared to closing levels on Aug. 4 of 73 bid, 75 offered.

A trader meantime saw its 10¾% notes due 2011 continuing their slide, to around 10 bid, 12 offered, down another 2 points on the session.

Kenneth Lim contributed to this report

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