Movie Gallery ready to blow; Pacific Lumber climbing; Hooters' hotel sees boost

By Stephanie N. Rotondo

Portland, Ore., Jan 22 - Concerns of covenant violations and bad third-quarter results caused rising anxiety about Movie Gallery Inc. but the bonds still managed to record gains on short covering after the company posted a net loss of more than $35 million for the third quarter of 2006.

The demise of Movie Gallery was characterized last week by one trader who said the company was a ticking time bomb, with a fuse of three to six months, or after the covenants expired. On Monday, another trader was indicating that he believes the time is now.

Elsewhere, as the lumber industry continues to flounder, Pacific Lumber Co. (Palco) filed bankruptcy, but despite the gloom, the privately held company has seen its debt record some big increases over the last month and one trader said the bonds had jumped 6 points from last week.

In action affecting another lumber name, Canada-based Tembec Inc. was better on late-breaking news of a new C$250 million amended and restated working capital facility, pushing its 8 5/8% bonds due 2009 up 1 point to 82 bid, 84 offered. Another trader saw the Tembec 8½% bond due 2011 at 76 bid, 77 offered, up 2 points. The embattled Canadian forest products company's bonds have seen recent surges from favorable foreign exchange conditions with the Canadian dollar sinking against the U.S. dollar.

About a year after the Hooters brand took up residence at the former San Remo Casino and resort, formally known for its physical address in Las Vegas as 155 East Tropicana LLC, the company announced just ahead of the weekend that the 696-room hotel was being pursued by a group of investors. The news gave the so-called Hooters bonds a boost Monday after spending the last year plagued by financial difficulties.

Fuse lit on Movie Gallery

Movie Gallery's bonds got a lift from short covering on Monday while the bank paper softened, especially on the bid side, as investors reacted to the third-quarter results.

The company's 11% notes due 2012 gained as traders covered their short positions, one placing the bond at 77 bid, 78.5 offered. Another trader pegged the issue up 1.5 points at 78.25 bid, 78.75 offered, while a third trader called them up 2 points at 76 bid, 78 offered.

The term loan B closed the session at 98.25 bid, 98.75 offered, according to one trader, and at 98 bid, 99 offered, according to a second trader. Both were weaker from the close Friday, when the bank debt was being quoted at 98.5 bid, 99 offered.

For the third quarter of 2006, the company reported a net loss of $36.1 million, or $1.13 per share, compared with a net loss of $12.5 million, or $0.39 per share, in the comparable period last year. Included in the net loss is $18.3 million of pre-tax charges, primarily non-cash, related to accounting for asset retirement obligations, store closures, the company's continued restructuring efforts and stock compensation expense.

Also for the quarter, total revenues were $583 million, an increase of 1.8% over revenues of $572.4 million last year, and adjusted EBITDA was $35.9 million.

These unimpressive financial results came on the heels of the company's Friday 10-Q filing with the Securities and Exchange Commission that warned of potential covenant violations for the first quarter of 2007.

The Dothan, Ala.-based movie rental company is exploring various strategies regarding further amendments to its credit facility or a refinancing that could include raising additional equity, sale/leaseback transactions and subleasing and restructuring store leases.

A fund manager told Prospect News on Monday that Movie Gallery has not yet approached lenders on a possible amendment and that the covenant compliance warning had little affect on the loan trading levels since it is for first-quarter 2007.

The fund manager went on to say that third-quarter 2006 covenant compliance has been maintained and that the company is expected to remain in compliance through the fourth quarter of 2006.

Still, one bond trader is expressing concern.

"It's a credit we haven't liked for a while," he said. As the only movie retailer to not "embrace" the advent of online rentals, Movie Gallery is "totally behind the 8-ball."

One potential savior of the company would be a buyout by Netflix, Inc. or Blockbuster Inc., the trader said.

But, "if it hasn't happened by now, it probably won't."

Movie Gallery stock rode a rollercoaster but the Nasdaq-listed shares closed up $0.12 at $3.14.

Palco positive despite bankruptcy

Palco has seen some big gains despite the announcement Friday that the Scotia, Calif., lumber company and its subsidiaries filed for bankruptcy. One trader said its notes have gone up about 10 points from earlier this month and gained 6 points in the last week, trading around 90 on Monday.

"It's some pretty liquid debt," one trader said.

According to court papers, Palco's inability to make a $27 million payment on secured bonds connected to the company's forested lands prompted the filing for Chapter 11 protection, a move that would allow the company to "avoid foreclosure" and reorganize. The company places blame on environmental restrictions that limit cutting in redwood-rich lands the company owns.

Palco is owned by Texas financier Charles Hurwitz.

Hooters bonds boosted by bid

155 East Tropicana announced Friday it signed a letter of intent to be acquired by NTH Advisory Group, LLC, a Santa Monica, Calif.-based casino and hotel development and advisory firm, in a $95 million deal that includes the purchase the hotel's 8% senior secured notes due 2012 as it would trigger a change-of-control feature.

But one analyst said this seemed "strange."

"The bid as described in the news release is way too high in my opinion," he said.

The analyst said that other investors had looked into purchasing the company late last year but were concerned that the bonds were not covered. At the time, the notes were trading around 85. At close of market Monday, the paper was quoted at 95 bid, 95.5 offered.

The analyst could not explain why this recent offer was eliciting such a response, noting that the hotel and casino was a smaller operation.

"There really doesn't seem to be room for expansion," he said.

Amid news of the potential acquisition, Standard & Poor's placed the company on developing watch.

Broad market strength

Elsewhere in distressed territory, Sea Containers Ltd. paper was up 1.5 points across the board with the 10½% bonds due 2012 at 84.5 bid, 86.5 offered, the 7 7/8% bonds due 2008 at 80.5 bid, 82.5 offered and the 10¾% bonds due 2006 at 85.5 bid, 86.5 offered.

Adelphia Communications Inc.'s 10¼% bonds due 2011 advanced 1 to 1.5 points to 105.5 bid, 106.5 offered, while the 10¼% bonds due 2006 added 1 point to 101 bid, 103 offered.

Calpine Corp. was better, as well, although traders noted there was no news moving the name. The paper was described as higher by 2 points with the 8¾% bonds due 2007 at 105.5 and the 8½% bonds due 2011 at 96 bid, 97 offered.

In another example of the market's strength, a trader saw Le-Nature's Inc. 9% bonds due 2013 up to 18 bid, 20 offered from a previous 14 bid, 16 offered, although he did not know why the paper moved.

Delta Air Lines Inc. was on a bumpier ride. One trader saw the carrier's paper pushed as high as 69.75 in the morning, with the 8.30% bonds gaining altitude only to fall back later and end unchanged at 67 bid, 68 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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