Movie Gallery loan up on Blockbuster results; Tembec bonds continue gains

By Paul Deckelman and Sara Rosenberg

New York, April 27- Movie Gallery Inc. saw its term loan B trading levels strengthen during Thursday's market hours, as sector peer Blockbuster Inc. released solid financial numbers - giving some hope and an optimistic attitude to Movie Gallery investors, traders in that market said.

The company's bonds were meantime seen unchanged to somewhat higher on the news.

Elsewhere, Canadian forest products company Tembec Industries Inc.'s bonds continued the strong rise that they have seen this week on a combination of earnings results and hopes for a resolution soon of a trade dispute between the United States and Canada that has hurt paper, pulp and lumber companies having operations in Canada.

Dothan, Ala.-based film rental company Movie Gallery's bank debt was seen closing out the session Thursday at 92.5 bid, 93.5 offered, up from Wednesday's levels of 91.5 bid, 93 offered, traders said.

On Thursday morning, Movie Gallery's larger rival, Blockbuster, announced financial results for the first quarter that included a net loss of $1.9 million (three cents per share) - a solid improvement of $55.6 million from the big year-earlier net loss of $57.5 million (31 cents per share).

Adjusted net income for the latest first quarter was $13 million (five cents per share) - a $61.6 million swing from the year-ago adjusted net loss of $48.6 million (26 cents per share).

Revenues for the first quarter declined 7.7% to $1.43 billion compared to $1.55 billion for the first quarter of last year. But these decreases were partially offset by an increase in revenues from Blockbuster Online resulting from growth in the subscriber base, which totaled approximately 1.3 million subscribers at March 31.

Cash flow from operating activities increased by $150.7 million to $41 million from a $109.7 million deficit for the first quarter of 2005 and free cash flow increased by $181 million to $32.9 million from negative $148.1 million for the first quarter of 2005.

Following the release of these financials, the Blockbuster, a Dallas-based movie rental company, saw its term loan B rally to par bid, par ½ offered from previous levels of 99 bid, 99½ offered, one trader added.

Although Blockbuster and Movie Gallery - the Number-One and Number-Two video rental operations in the United States respectively - are fierce rivals, and good news for Dallas-based Blockbuster might seem to come at Movie Gallery's expense, the conventional wisdom seems to be that the industry leader's improved finances are a harbinger of better times ahead for its smaller rival, since the two companies are affected by many of the same industry dynamics, including the rise of competing movie-delivery services, like the on-line Netflix Inc., and a general viewer indifference over the past few months to much of the new product coming out of Hollywood.

But the bank debt traders indicated that even without the Blockbuster financials, Movie Gallery has had somewhat of a stellar week, as levels have been inching their way higher on a daily basis, creating a two-plus point gain when compared to the 90 bid, 91.5 offered quotes seen at the end of last week.

Positive momentum in the name has been attributed to recent announcements that the company has reached a management agreement with Hilco Real Estate LLC under which a program will be initiated to restructure leases at more than 1,100 existing Movie Gallery and Hollywood Video stores, and that it expects to be in full compliance with the financial covenants for the reporting period ended April 2.

Movie Gallery's levels were also said to have been helped by Netflix's positive first quarter results that were released early this week. Just as was the case with Blockbuster, even though Netflix is a rival of Movie Gallery - and its success has helped to dent the latter's bottom line in no small measure - its good news is seen as an indication that there's hope for the whole movie-delivery sector.

And Movie Gallery investors were also looking over an additional bit of news that came at mid-week and that could give Movie Gallery a boost - the announcement via an SEC filing that 8.6% shareholder Schultz Asset Management LLC has floated the idea of raising capital from existing shareholders via a stockholder rights offering, with such proceeds to be used to reduce debt.

But while Movie Gallery's bank debt has been steadily firming on all of this potentially good news, it has been another story for its bonds, which have traded with some volatility - but which always seem to have returned to prior levels.

In Thursday's dealings, a trader saw the 11% notes due 2012 steady at the same 52 bid, 54 offered levels they have held for the past several sessions, although another trader saw those bonds having been lifted to around 53.5 bid, 54.5 offered - up a point on the day. The trader also saw Blockbuster's 9½% notes due 2012 up a point at 94.5 bid, 95.5 offered - although another source saw the latter's bonds unchanged as well around 93.5 bid.

Refco higher

Elsewhere, a trader in distressed notes saw the 9% bonds due 2012 of Refco Inc. as having firmed to 75 bid, 78 offered, well up from the previous levels in the upper 60s that the bankrupt New York-based commodities and forex trading company had previously held.

And he saw bankrupt Houston-based building contractor Integrated Electrical Services' notes jump to a whopping 155 bid, 160 offered from 146 bid, 155 offered.

Tember gains on dispute hopes

Tembec's bonds were meantime seen continuing to move up on hopes that the expected resolution soon of the U.S.-Canada trade dispute could unfreeze millions of money held in escrow accounts for the Montreal-based forest products company.

A trader quoted its 8 5/8% notes due 2009 at 59.5 bid, up two points on the day, while its 8½% notes due 2011 were likewise a deuce better, at 57.5 bid.

He also saw Tembec's 7¾% notes due 2012 at 57.25 bid, up three points on the day.

Dura lower after results

In the hard-pressed automotive sector, Dura Automotive Systems Inc.'s 9% notes due 2009 were seen down 2¼ points to 56.25, while its 8 5/8% notes due 2012 were off ¾ point at 86.

Dura's bonds slid after the Rochester Hills, Mich.-based automotive components maker reported a net loss for the quarter of $7 million (38 cents per share) versus year-earlier red ink of $4.8 million (26 cents per share), as sales slid sharply amid continued problems in the domestic automobile industry, a major portion of Dura's customer base.

Dura senior executives told analysts on a conference call following the release of the results that the company was meantime continuing with its previously announced global restructuring of its operations that includes the possible closure of between five and 10 plants in the United States and overseas, as well as the separate possible sale of three German plants.

And they said the company is in good shape, liquidity-wise, as a result of having recently enlarged its $150 million senior secured second-lien term loan facility due 2011 by $75 million, a transaction which closed in March (see related story elsewhere in this issue).

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