Bally's bonds break a sweat, drop as much as 20 points; James River earnings prompt loss

By Stephanie N. Rotondo

Portland, Ore., March 16 - Bally Total Fitness Holding Corp.'s bonds got a workout Friday after recent news that the company might soon have to file for bankruptcy.

In addition to warning that it was trying to restructure its debt, the fitness center operator also announced Thursday that it would delay filing its fourth-quarter and annual earnings due to errors found in its membership database. The errors could result in the company having to restate its earnings for the previous fiscal year.

The company also estimated it would report a loss for the 2006 fiscal year.

As the company tries to bench press its financial woes, market players saw the company's bonds drop as much as 20 points from their previous levels.

Meanwhile, wider posted losses meant losses in James River Coal Co.'s bonds as well. The company almost doubled its losses for the fourth quarter of 2006, compared with the same quarter of 2005. On that news, the company's bonds sank about a point.

Amid subprime mortgage lender woes, Doral Financial Corp. announced it had sold 11 of its New York City branches to the largest savings and loan based in New York. That news had little effect on the financial institution's bonds or preferred structure but did help out on the equity side.

Traders attributed the overall quiet day to bad weather and people taking off early. One market player said he thought the market was quiet because "they are out in [Las] Vegas for the [NCAA] games."

Bally's bonds drop

Bally's late Thursday announcement that it might file for Chapter 11 protection made its bonds among the most active during trading Friday.

A trader saw its 10½% notes due 2011 - which on Thursday had dropped from previous levels around par to as low as an 84-85 context in active trading, before firming a bit off that low to end the day at around 89 - go back up to 92 bid, 93 offered. Trading was heavy, with many big block trades of $1 million or more taking place.

"The bonds were down 7 points on the week, but they did regain some composure," he said.

But the company's 9 7/8% subordinated notes due 2007 fell hard, dropping almost 20 points to come in at 73.

A trader saw the 9 7/8s quoted Friday as low as 65; they ended at 72 bid, 73 offered, well down from mid 90s on Thursday.

Another trader called Bally "the bond of the day," adding they were "quoted non-stop." He saw 101/2s up 8 points at 93 but saw the 9 7/8s "down a good 27 points" at around 70.

The 9 7/8s are set to mature in October, with company repaying the principal to holders, but "obviously, there's a thought that that's not happening," the trader said.

In early afternoon trading, the subordinated notes fell to 68, while the 10½% bonds were seen at 91.5. A market source pegged the subordinated notes as closing at 72.5 and the senior note at 92.

According to a trader, however, two people hold most of the fitness company's bonds. He attributed the notes' heavy activity to short covering.

The Chicago-based company said it would have to delay filing its annual report on Thursday. In a press release, Bally's said it expected to "report a loss from continuing operations for 2006 and that it expects cash collections of membership revenues in 2006 to be approximately 3%, or more than $25 million, lower than cash collections in 2005. The trend of lower cash collections has continued in the first eleven weeks of 2007 and is expected to continue through at least the remainder of 2007."

The company did estimate that its liquidity was about $45 million, with $2.1 million available under its amended credit agreement. The company also said it had $827 million in outstanding debt, with interest payments due in April, July and October. The subordinated bonds, a total value of $300 million, mature later this year.

As the company looks to restructure its debt, the possibility of bankruptcy looms large. On the equity side, investors did not react kindly to the news, prompting a more than 60% plunge in its shares. The stock closed down $1.24, or 62.31%, at 75 cents.

Elsewhere, a trader saw the company's term loan close at 101.5.

James River sinks

A wider-than-expected loss in its fourth-quarter results prompted James River Coal's bonds to drop about a point by the close of the trading day.

A trader called the 9 3/8% notes due 2012 down 1 point at 87 bid, 88 offered. Another trader called the notes down as much as 2 points at 87.5 bid, 88.5 offered.

The company posted at $15.8 million loss for the fourth quarter of 2006 compared with a $9.4 million loss for the same quarter of 2005. The results included $8.9 million in labor-related charges.

According to Peter T. Socha, chairman and chief executive officer, the company's mines performed generally well, but soft market conditions and new regulatory measures contributed to the quarterly loss.

For the fiscal year, the company posted a loss of $26.2 million compared with a loss of $12.3 million. Revenue grew 24% to $564.8 million from $454 million.

Doral bonds steady

News that Puerto Rico-based Doral had sold 11 of its New York City branches did little to boost the financial institution's floating-rate notes, though its equity caught some action.

A trader said the bonds closed at 94 bid, 95 offered, relatively unchanged from the previous day. He said the company's preferred structure "didn't really catch a bid. It tried, but it didn't."

The equity side, however, went on a roller coaster. The trader said he saw the shares up and then down, up and then down over the day. At market close, the stock was up 37 cents, or 28.24%, to $1.68.

The sale of its New York City branches to New York Community Bancorp Inc. includes $230 million in taxi medallion, commercial and commercial real estate, multifamily, consumer and industrial loans, and $370 million in deposits at a 4% premium from Doral. The company has previously stated that it needs "significant" outside capital to refinance $625 million in notes that mature in July. It has restated several years of results to fix its accounting for mortgage securities.

Hayes up on rights offering

A trader saw Hayes Lemmerz International Inc. 10½% notes due 2010 up 6 points to 106 bid, 107 offered as the company's board approved a $180 million rights offering.

According to a press release, the auto parts maker will use the net proceeds of the rights offering to repurchase the outstanding senior notes issued by its subsidiary, HLI Operating Co. Inc., and to pay any required fees and expenses related to the rights offering.

Elsewhere in the autosphere, a trader "didn't notice a lot of activity" in Remy International Inc. He quoted the 8 5/8% notes due 2007 at 75, "pretty much where they were before."

The trader also said Delphi Corp. and Dana Corp. were "pretty much blah."

Broad market mixed

A trader called Delta Air Lines Inc.'s 8.30% bonds due 2029 ending at 53 bid, 54 offered, "about where it was" previously.

In other distressed airline paper, he saw Northwest Airlines Corp.'s 10% notes due 2009 get up to 86.5, then settle back down to 84.5. He characterized them as up 3 points during the day.

Meanwhile, a trader saw Movie Gallery Inc.'s 11% notes due 2012 around 88 bid, 89 offered, "not much different than where they had been."

Paul Deckelman contributed to this article.

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