Movie Gallery, Blockbuster weaker; Housing sector slumps; Linens n'Things dips

By Stephanie N. Rotondo

Portland, Ore., June 28 - Movie Gallery Inc.'s bonds continued to decline Thursday amid mounting pressure in the industry and potential troubles at home.

In addition to the credit amendments Blockbuster Inc. said it would seek Wednesday, online move rental provider Netflix Inc. is stepping up its campaign against Blockbuster by cutting the prices on some of its monthly package rates.

Though Movie Gallery does not have an online presence, or an on-demand service, the news serves to remind investors of that fact.

"Everybody's getting hurt," a trader said.

Another trader said he thought a potential debt-for-equity swap in Movie Gallery's camp might also be contributing to weakness in the bonds, as he did not think the process was going very well.

Adding insult to injury, Beazer Homes USA Inc. announced it had fired a top executive for attempting to destroy documents. On the news, the entire housing sector seemed to slump, as a trader said the sector lost about 3 points across the board.

The Federal Bureau of Investigation has been investigating Beazer after a report published in late March alleged that the company sold homes to low-income buyers who could not afford them. The allegations state that the company therefore obtained mortgages based on expectations the buyer's income would increase - a practice prohibited by the Federal Housing Administration.

With the housing industry weakening, retailers such as Bed, Bath and Beyond are expecting profits to take a downturn. Still, that company posted a higher net income for the first quarter of 2007, which prompted a decline in Linens n'Things bonds.

Things are starting to quiet down for the week, as many market players are taking extended weekends ahead of Independence Day. The market will be closed Wednesday and is expected to close early Tuesday.

Movie Gallery, Blockbuster weaker

Movie Gallery bonds continued to fall Thursday after Wednesday's beat down on the back of the news that rival Blockbuster would seek amendments on its credit agreements.

"Whoa, that's the story, baby," a trader said of the Dothan, Ala.-based movie rental chain. He said the company's 11% notes due 2012 have dropped at least 20 points over the last few weeks, noting that the bonds were around 90 three weeks ago and in the 80s one week ago. He said the bonds hit a low of 65 during the trading day.

Blockbuster's bonds also fell, losing about 2 points on the day, the trader said. He pegged the 9% notes due 2012 at 93 bid, 94 offered.

"They haven't been here for six months," he said. "I reckon they are screwed."

At another desk, a trader said Movie Gallery's bonds were down at least 6 points on the day, trading around 68.25, with a high print of 71.

The second trader also saw Blockbuster's bonds dip a bit to 93 bid, 93.25 offered.

As for Blockbuster's attempts to breach its covenants, the second trader said he thinks the Dallas-based company has a better shot at turning things around than Movie Gallery does.

"Eventually, there won't be stores anymore, or at least [less] than there is now," he said. With that in mind, Movie Gallery is behind the 8-ball, as they have no online presence.

The trader mentioned that he believes Movie Gallery is attempting to do a bond exchange, but he did not think it was going very well - which can only hurt the bonds more.

Another trader said "an awful lot of Movie Gallery bonds traded, a good amount of value," with many of the trades being in sizable blocs. He saw the bonds - which on Wednesday had traded around a 70-71 context - fall as low as 65 bid, 66 offered, before coming off those lows to end at 68 bid, 69 offered, "still down on the day but off their bottom."

He saw the Blockbuster notes "down a couple too," at about 92.5 bid, 93.5 offered versus Wednesday's close at 94.

Elsewhere, a trader saw the Blockbusters "holding to the low end" of Wednesday's range, at 93.5 bid, 94.5 offered, but said "Movie wasn't that lucky," falling into a 68-70 context for most of the day, with lows around 67.5 and highs around 71. "Most trades had a 68-handle all day," the trader said.

Also putting pressure on the sector is news that online movie rental provider Netflix had decreased the price of one of its packages, a move designed to edge out competitor Blockbuster.

Homebuilders dip

It was bad news for homebuilder Beazer as the company announced it had fired its chief accounting officer for attempting to destroy documents.

Beazer has been under investigation by the FBI for potential fraud. Last month, the company launched an internal investigation to determine if its employees were violating securities laws.

The news prompted a slip in the company's bonds, as a trader saw the 6 7/8% notes de 2015 fall 2 points to 82 bid, 84 offered, down from the previous day's levels around 84 bid, 86 offered.

The trader also saw the 8 3/8% notes due 2012 at 94 bid, 95.5 offered.

The trader added that there was "not a lot of action" in the debt, "but it was quoted a lot lower."

WCI Communities Inc. also felt the pressure from the Beazer news. The trader slated the 7 7/8% notes due 2013 down at 92 bid, 94 offered and the 6 5/8% notes due 2015 at 89 bid, 91 offered.

Overall, the trader said the entire housing sector was likely down 2 to 3 points on the Beazer news. The sector has been feeling the burn of late, given the recent flare up in subprime mortgage concerns.

The trader also said that he did not see any markets in distressed Technical Olympic USA Inc.'s bonds. However, a market source saw the Hollywood, Fla.-based homebuilder's bonds edge lower, with the 9% notes due 2012 off half a point at 93 and the 10 3/8% notes due 2012 down 1.25 points at 73.75.

Linens n'Things falls

Linens n'Things is also hurting due to housing weakness, which is slowing profits in the retail sector as well.

A trader said the home accessories retailer's floating-rate notes were "off a couple points" as rival Bed, Bath and Beyond posted its first-quarter results. He quoted the debt at 74 bid, 75 offered, though the bonds traded down to the 72.5 level.

Another trader said the notes were "very active," with the bonds falling as low as 72 bid, 73 offered before coming off the bottom to end at 74.5 bid, which he called down a point on the session.

Bed, Bath and Beyond showed a higher net income at $104.6 million, compared to a net income of $100.4 million the previous year. However, the company said it expected full-year profits to fall, given a decrease in new and existing home sales.

Delphi steady, Dura up

A trader said Delphi Corp.'s bonds were essentially unchanged, with the 8¼% notes due 2033 at 124 bid, 126 offered and the 6.55% notes due 2006 at 118.75 bid, 119.75 offered.

At another desk, a trader said that Dura Automotive Systems Inc.'s 8 5/8% notes due 2012 ended at 64 bid, 65 offered, "up a bit from [Wednesday], while seeing the bonds at one point trading as high as a 66 bid, 67 offered range, "a lot higher than yesterday," when the bonds were trading around 63.

However, he said there was "not a lot of volume "in the bankrupt Rochester Hills, Mich.-based auto systems maker's paper.

Another source saw its 9% subordinated notes due 2009 down a point on the day at 13.

Solo Cup up

Traders saw Solo Cup Co.'s bonds up on news of the paper and plastic cup and dishware company's $130 million sale/leaseback transaction, the proceeds of which will go to cut bank debt.

One quoted Solo Cup's 8½% notes due 2014 as having moved up to around 87.75 at the open versus Wednesday's levels around 86 bid, 87 offered.

Then the bonds got as good as 89 bid before ending around 88 bid, 88.5 offered.

Another trader pronounced the bonds up "1 or 2 points, on pretty good size" at 88.25 bid, 89.25 offered.

Paul Deckelman contributed to this article.

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