Movie Gallery gallops on amendment hopes, subleasing news; Northwest up despite U.S. probe

By Paul Deckelman and Sara Rosenberg

New York, March 15 - Movie Gallery Inc.'s term loan headed up by about two points and its bonds jumped six points as investors were hopeful that the company's amendment process would prove successful as Wednesday's consent deadline came and went, and plans to look into subleasing opportunities were announced.

Elsewhere, Northwest Airlines Corp.'s bonds were gaining altitude, despite the news that the Labor Department is looking into the bankrupt Eagan, Minn.-based Number-Four U.S. airline carrier's underfunded pension plan.

In the automotive arena, Dana Corp.'s bonds continued to firm, presumably mostly on technical concerns linked to the derivatives market.

But General Motors Corp. and its General Motors Acceptance Cop. financial arm were little changed on the day, investors not much swayed by the news that Kohlberg Kravis Roberts & Co. has put together a syndicate to make a bid to buy a controlling interest in GMAC, thus now expanding the number of potential bidders to two.

Movie Gallery's 11% notes due 2012 were seen by one trader as first having firmed to 53 bid, 56 offered from 47 bid, 49 offered on Tuesday.

Another trader saw the bonds do even better, pegging them up six points at the end of the day to 54 bid, 56 offered on "pretty active" dealings.

And yet another trader saw them even better than that, quoting them up a whopping eight points on the session, at 55 bid, 56 offered.

In the bank debt market, the company's term loan closed out the day quoted at 93.75 bid, 94.25 offered, but a trader said it had traded as high as 94.5 at one point during the session. On Tuesday, the term loan had ended the day quoted at 92 bid, 92.5 offered.

The third bond trader - while acknowledging the news that the Dothan, Ala.-based Number-Two U.S. video rental chain operator had entered into a management agreement and alliance with Excess Space Retail Services Inc. to explore opportunities for Movie Gallery to sublease retail space at more than 2,200 of its 4,800 existing Movie Gallery and Hollywood Video stores - said that he thought that the potential for help on the bank covenant front was a more likely driver for the upside moves in the company's paper.

Movie Gallery presented an amendment proposal at its March 6 bank meeting that would relax financial covenants and in return the lenders would get an amendment fee and higher pricing.

The company is not currently in default under its covenants but needs the relief going forward.

No official word as to whether the amendment passed was available prior to press time.

In announcing the plans to try to find sublease tenants to rent parts of its stores, Movie Gallery declared that "in addition to the incremental revenue we expect to realize through subleasing portions of the stores, we look forward to the additional traffic that our retail partners will generate.

"By taking advantage of our outstanding retail presence, we expect this initiative to improve our operating results and create value for our shareholders," said Keith Cousins, executive vice president and chief development officer, in the news release.

Northwest higher

Elsewhere, traders saw Northwest's bonds up more than two points on the day, such as its 7 7/8% notes due 2008, which rose to 41.5 bid.

Northwest said on Wednesday that it would cooperate with Labor Department investigators looking into its underfunded pension plan.

The government agency had sent a subpoena to the airline back in January, saying it was scrutinizing Northwest to determine "whether any person has violated or is about to violate" federal pension laws.

However, the probe was delayed until now as Northwest negotiated for - and received - a confidentiality agreement to ensure that department officials and investigators not reveal sensitive Northwest documents such as its business plan to competitors in the course of the investigation.

Besides looking at the pension problems, the subpoena also seeks any documents related to Northwest's decision to seek bankruptcy protection and asks for "all documents and communications" related to stock sales by officers or directors.

Northwest sought Chapter 11 protection last fall from its junk bond holders and other creditors via a filing with the U.S. Bankruptcy Court in New York - ironically on the same day and at the same court as rival Delta Air Lines Inc.

Meanwhile, hearings continued in Washington Wednesday on Delta's efforts to void its negotiated contract with its 6,000 pilots as the bankrupt Atlanta-based airline carrier runs what it called "a race against time" to restructure itself.

The third-largest U.S.-based airline operator has also said that it will probably terminate the pilots' pension plan as a cost-saving measure.

At Wednesday's hearings, a restructuring expert from The Blackstone Group, Delta's financial advisor, told federal arbitrators who will decide on whether the contract can be scrapped that the airline is living on borrowed time, with borrowed money, and must move quickly to cut its labor costs. Those hearings began on Monday.

The Airline Pilots' Association has warned that its members will strike if their contract is voided. Delta says such a strike would be illegal - and could ground the venerable airline for good.

Delta has lost more than $12 billion over the last four years, finally crash-landing in Chapter 11 last September. The airline and the pilots signed an agreement in 2001 that was considered one of the richest in the industry, but Delta was able to dragoon $1 billion in permanent cost savings from the captains in late 2004, staying out of bankruptcy - for a while. Among the concessions the pilots agreed to was an immediate 32.5% pay cut. Even after that massive giveback, pilots who worked the full year still made an average of $157,000 last year, making them the highest salaried group outside of management.

The pilots are Delta's only unionized employees. The airline has imposed pay cuts on its other non-employee groups, and says the captains must cough up another $305 million in permanent cuts - far more than the $140 million the pilots have offered.

Even though top management employees have taken large pay cuts, the pilots' union scorned those as strictly cosmetic and noted that some executives were given bankruptcy-proof pensions at a time when Delta is seeking to terminate the pilots' retirement plan.

Congress is currently working on a pension reform bill that would give the nation's beleaguered airlines a number of years in which to pay their underfunded pension obligations - but that bill is by no means a done deal and Delta indicated it cannot wait for the bill to be finalized, which would not occur before next month at the earliest.

Delta has not announced a timetable for terminating the pension - but if it does drop its pension problem into the lap of the federal government's deficit-ridden Pension Benefit Guaranty Corp., Delta will follow in the footsteps of rivals United Airlines and US Airways, which dumped their pensions as part of their bankruptcy restructurings.

GM rises, bonds give up gains

Back on terra firma, General Motors Corp.'s revolver gained some ground during market hours as news reports surfaced about a new bid for a majority stake in GMAC, according to a trader.

The revolver closed out the day quoted at 83.75 bid, 84.5 offered, up about half a point from Tuesday's close, the trader said.

According to a Wednesday story in The Wall Street Journal, GM is considering a $12.5 billion to $13 billion bid from a group led by Kohlberg, Kravis & Roberts and some banks for GMAC.

Another player in the mix is Cerberus Capital who was recently heard to be teaming up with its portfolio firm, Aozora Bank Ltd. of Japan. It was reported that the Japanese bank might put up $1 billion of what is expected to be $11 billion that Cerberus is likely to bid for a 51% stake in GMAC.

And, another Japanese bank, Norinchukin Bank was reported last week to also be considering joining the Cerberus-led effort to buy control of GMAC. Cerberus has already enlisted Citigroup Alternative Investments, a Citigroup Inc. buyout unit, as a partner.

GM has been trying for months now to sell its stake in GMAC in what has been a very bumpy road. A number of companies thought to be potential buyers, including Wells Fargo Bank and Bank of America, have said they were not interested, and Wachovia Bank was recently reported to have dropped out of a joint bid with Kohlberg, Kravis & Roberts - but Wednesday's Journal story said Wachovia was back in.

But while GM's bank debt firmed, its bonds ended the day little changed, traders in that market said. They said that while the news about KKR's bid for GMAC helped the bonds firmed early on, the paper dropped back when it became apparent there were flaws in the KKR plan from GM's perspective.

They also said that news that officials of the United Auto Workers had told them that agreement on help for bankrupt Delphi Corp. from GM and UAW was still far off helped to hold the bonds down.

A trader saw GM's 8 3/8% notes due 2033 at 73.75 bid, 74.75 offered and saw GMAC's 8% notes due 2033 at 93.5 bid, 94 offered, both down ¼ point on the day.

Dana rise continues

Among other automotive names, Dana Corp. - whose bonds have recently been riding a rocket, fueled by expectations that the bankrupt Toledo, Ohio-based components company's assets are sufficient to cover its debt obligations in full, as well as by technical factors like a short squeeze linked to the derivatives contract market - were again firm on Wednesday. A trader quoted its 6½% notes due 2008 and its 5.85% notes due 2015 each up a quarter point, at 77.75 bid, 78.75 offered and 76 bid, 76.75 offered, respectively. Its 7% notes due 2028 were up half a point at 77.25 bid, 78.25 offered.

Refco down again

Refco Inc.'s bank debt continued to fall off in trading on Wednesday as more noise about court findings hit the market, according to a trader.

The bank debt closed out the session quoted at 98 bid, 98.5 offered, down close to a point on the day when compared to Tuesday's closing levels of 98.75 bid, 99.25 offered, the trader said.

"There are some sellers," the trader said, explaining that this was putting downward pressure on the paper.

Recently there has been a lot of news stories flying around about Refco, such as that the bankruptcy court judge said that the company's broker-dealer unit, Refco Capital Markets, should be liquidated separately from the rest of the company - putting some pressure on parties to come up with a bankruptcy plan quickly.

In addition, some talk has come out that Refco problems may be more extensive than originally thought as it was rumored that the company held offshore accounts with as much as $525 million in fake bonds.

A trader saw the New York-based financial company's 9% notes due 2012 drop to as low as 46 bid, 48 offered in morning trading, down from Tuesday's levels at 49 bid, 51 offered. But he saw the bonds bounce smartly off those lows to come back to 50 bid, 52 offered by day's end.

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