Movie Gallery continues downward spiral; Trump bonds boosted on market buzz

By Stephanie N. Rotondo

Portland, Ore., July 3 - The announcement that Movie Gallery Inc. had failed to meet certain financial obligations on Monday continued to propel the company's bonds deeper into distressed territory Tuesday.

The bonds added a loss of more than 40 points Tuesday to its approximately 25-point dip from Monday, trader said. Still, market sources were mixed on whether a bankruptcy filing would be in the company's future, although all agreed that the situation was not good.

"I never liked this company's prospects anyway," a trader said.

The Dothan, Ala.-based company held a conference call for holders of its second-lien term loan, a trader also reported, but by market's close, it was uncertain what occurred in that call.

Trump Entertainment Resorts Inc. regained some of the losses it incurred in the previous day's trading, as one trader said there was buzz circulating on the Atlantic City casino and hotel.

The company announced Monday that it had not found a buyer, ending a three-month search. However, the trader said there is talk that the company would sell some of its properties, which prompted a small boost in the bonds.

With the distressed bond market closing early in preparation for the July Fourth holiday, many market players were away from their desks. Those that were working said that the day was dominated by Movie Gallery and, away from that name, the market was deadly quiet.

Movie Gallery on downward spiral

Movie Gallery dominated the distressed bond market Tuesday, just one day after the company announced it had failed to meet certain covenants under its credit facility.

While Monday saw a major drop in the bonds, it was a drop in the hat compared to Tuesday. Traders reported the bonds fell as much as 42 points on the day.

A trader quoted the 11% notes due 2012 as low as 19 bid, 20 offered, though the bonds regained some of those losses to settle in around 24 bid, 25 offered.

"Wow, that was a real bang up," the trader said. "I don't think they stand a chance."

The trader added that this is the second time Movie Gallery has been in need of a bailout and, with the amount of debt they incurred the last time, it does not look good. He speculated that Goldman Sachs, which arranged the company's most recent refinancing, would put itself up higher in the capital structure and "screw everyone else."

At another desk, a trader saw the bonds fall as low as 13 before coming back to the 24.5 bid, 25.5 offered context. The trader added that the debt was trading flat, though he was not so sure that it should be.

"I don't know if a company like that will file bankruptcy," he said. If the company can maintain an EBITDA at 5 to 6 times, he did not see it happening.

"It's either that, or Goldman [Sachs] is trying to buy the company," he said.

Elsewhere, a trader pegged the notes at 22 bid, 24 offered, also flat. He said he saw the bonds trade as low as 16 and as high as 25.

However, unlike the previous trader, he said he saw a bankruptcy filing as possible.

"I think they end up filing," he said, noting that the company is "too top heavy."

"I don't think people think that the secured debt is going to give them a covenant release," he added.

Of course, he said, the company could hold an asset sale and close underperforming stores, but "I don't think that is going to do it."

"It will be tough getting much in the way of recovery," another trader said. "Maybe there is some recovery value, but it is hard to believe."

Meanwhile, the Dothan, Ala.-based company's bank debt narrowed its spread.

According to one trader, the term loan B was quoted at 87 bid, 89 offered, compared with the previous day's really wide levels of 80 bid, 90 offered.

But a second trader disagreed. This trader had levels going out at 88 bid, 92 offered, up from 85 bid, 90 offered on Monday.

The second-lien term loan was quoted at 50 bid, 60 offered, unchanged from previous levels, the second trader added.

Traders reported that a conference call was held Tuesday morning with holders of the second-lien paper. At market close, no one had heard what occurred in that call.

In other distressed movie rental chain paper, Blockbuster Inc.'s 9% notes due 2012 were also down, attributed to Movie Gallery's weakness.

A trader quoted the notes down 3 to 4 points at 91 bid, 92 offered.

Trump recovers some losses

While news that the company would not be bought out sparked a dip in Trump's bonds, talk of an asset sale boosted the notes a bit on Tuesday.

A trader said the 8½% notes due 2015 were active in morning trading and had regained some their Monday losses. He saw the bonds "up a little" at 95.75 bid, 96.75 offered just after noon.

Sara Rosenberg contributed to this article.

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