MedQuest/MQ Associates bonds up on merger; Movie Gallery steady; Dura seniors firm

By Stephanie N. Rotondo

Portland, Ore., Aug. 13 - It was a day for the record books Monday as an announced merger agreement sent MedQuest/MQ Associates Inc.'s bonds to the moon.

Traders said the boost - at least 20 points in one issue and 60 in another - was prompted by change-of-control put options.

On the other side of the spectrum, Movie Gallery Inc.'s bonds were crushed late Friday as the company posted its second-quarter results and warned that, without a capital infusion, it was unlikely the company could compete in the movie rental market.

Monday saw the bonds holding steady, however, while its bank loans edged up slightly. A trader said investors were really not surprised by the news, and many market sources said they expected the company to file for bankruptcy.

Meanwhile, Dura Automotive Systems Inc.'s creditors won one fight against Pacificor LLC as the committee was able to limit the equity firm's veto power. Still, one trader sees many more battles on the horizon.

However, with the one victory under their belt, the senior notes firmed on the day, while the subordinated notes were left unchanged.

MedQuest merger sends bonds higher

MedQuest/MQ Associates' bonds were "flying," in the words of one trader, as the company announced it had entered into a definitive merger agreement with Novant Health.

According to a statement issued by the company, Novant will pay $45 million cash at closing, along with an additional $35 million based on the company's 2008 EBITDA performance.

The acquisition of MedQuest by Novant will also results in a change of control of MedQuest's debt. Bondholders will have the right to put their shares for 101%.

It was due to that change-of-control put provision that the bonds skyrocketed. A trader pegged the 11 7/8% notes due 2012 at around 99, while another saw them at 99 bid, par ½ offered - up at least 23 points.

The second trader also saw the 0% discount notes linked to MQ Associates at 83 bid, 85 offered. Before the news, those bonds had last traded in the 20s.

The first trader said that, based on language in the merger prospectus, it was likely the bonds would get taken out. Under the agreement, bondholders can put the bonds, or the new company under Novant can redeem the debt.

"These bonds get taken out," he speculated. "They can get a bank loan for much cheaper."

"Good stuff," the trader added, pointing to the record climbs in the discount notes.

The second trader said he sees most investors putting their notes, but a company takeout is not impossible.

JP Morgan Partners LLC, a major stockholder in MedQuest, has already said it would back the agreement in a vote to be held no later than Sept. 14.

Traders expect Movie Gallery to file

Late Friday, Movie Gallery released its second-quarter results and stated there were concerns about the company's ability to continue.

On that, a trader said the 11% notes due 2012 were crushed after the market's official close. He said the bonds slipped to 18, while the first-lien term loan also fell to 77 bid, 80 offered.

"They'll file soon," he said, "and I don't think the bonds are the place to be."

Come Monday, the bonds were holding tight, as the trader pegged the bonds at 17.5 bid, 19.5 offered. Another trader saw the notes at 18 bid, 19 offered. At another desk, a trader said the bonds opened around 16 bid, 20 offered and closed at 18.5 bid, 19.25 offered.

"I'm surprised the bonds are trading with [accrued]," the first trader said.

Movie Gallery's first-lien term loan traded a touch stronger Monday, as investors had time to digest all that the company's recent 10-Q filing had to say and realize there weren't many surprises in there, a trader said.

The first-lien term loan traded at 83 on Monday, compared to a trading level of 82 on Friday, according to one trader.

A second trader had the first lien ending Monday's session at around 81 bid, 83 offered. By comparison, on Friday, a different trader had the paper going out at 80 bid, 82 offered.

"Everybody is expecting that they'll run out of money and file [for bankruptcy]. [It] Wasn't a shocker what they said in their 10-Q," the second trader said.

Another trader said he saw the Movie Gallery loan at 82 bid, 84 offered earlier in the day, "but it might be lower now."

In its 10-Q filed Friday with the Securities and Exchange Commission, the company said it would likely not have sufficient liquidity to operate its business through the third quarter of 2007 without gaining access to additional capital.

"Who would give them more money?" a trader asked.

As a result, the company is considering a number of alternatives, including asset divestitures, recapitalizations, restructurings, alliances with strategic partners, a sale to or merger with a third party and a Chapter 11 filing.

Furthermore, Movie Gallery plans to continue to take actions to conserve cash and improve profitability, such as accelerating the closure of unprofitable stores, consolidating stores in certain markets, realigning its cost structure to better reflect its reduced size and seeking a more competitive capital structure.

The company explained that the liquidity crunch is a result of significant losses from operations because of current industry conditions and increased competition in the home video market and significant vendor terms contraction.

For the quarter ended July 1, the company reported a net loss of $309.94 million, or $9.69 per share, compared to a loss of $14.90 million, or $0.47 per share, last year, and total revenue was $561.22 million, down from $601.29 million.

The company said in its filing that it is in talks with its first-lien lenders to discuss potential solutions. The company previously obtained a forbearance agreement with its lenders, but that agreement expires Tuesday.

"The forbearance is probably going to get pushed out. Everybody [is] already expecting a filing here anyway," a trader concluded.

"They might get an extension," another trader surmised. "But that is not going to stop the inevitable."

"If they fell away, I am not sure who would miss them," a trader said of Movie Gallery's pending demise. The market share they do have, he continued, is too small to keep the company afloat. Plus, he added, the company took on a lot of debt when it acquired the Hollywood Video chain.

"They're not going to make it," he concluded. "They're floundering."

The trader noted that the stock "dropped a dime" to 26 cents.

"That's not good," he said.

Meanwhile, rival Blockbuster Inc. saw its bonds edge higher - though whether the gain was a preemptive victory dance on Movie Gallery's grave was unclear.

A trader said the 9% notes due 2012 were up at around 85.5, adding that the bonds were "more like 84.5 Friday."

Another trader said the bonds were "up a couple I guess," at 85 bid, 86 offered.

Pacificor veto power curbed

In the distressed automotive world, Dura Automotive Systems' senior bonds moved up as the company's creditors made a deal with Pacificor.

A trader said the 8 5/8% notes due 2012 were up at 54.25 bid, 55.25 offered, though the 9% subordinated notes due 2009 were deemed unchanged at 4.5 bid, 5.25 offered.

According to the trader, the new deal "removed some uncertainty from the rights offering."

The company's creditors, as well as the U.S. Trustee overseeing the case, had previously objected to the backstop agreement with Pacificor, stating that the terms gave to much control to Pacificor. The previous proposal said that Pacificor must agree to who participated in the rights offering. The new deal strikes out that provision.

But while the language of the deal has been "cleaned up," as the trader put it, there are still more concerns that have not been addressed. The creditors are still worried that Pacificor, with its $300 million under management, is not big enough to fund the rights offering. The deal, new or old, also does not address the subordinated notes.

In a filing with the SEC Monday, Dura said it would not be able to file its quarterly results on time. The company posted its fiscal 2006 10-K just last month and has yet to report financials from the first and second quarters of 2007.

Broad market mixed

Technical Olympic USA Inc.'s bonds were seen "very quiet" as the market began its week. A trader saw the 9% notes due 2010 at 77 bid, 78 offered, while the 10 3/8% notes due 2012 were "still down a little" at 47.5 bid, 49.5 offered.

Another trader saw the 10 3/8% subordinated notes at around 50.

Meanwhile, the first trader said Fedders Corp.'s 9 7/8% notes due 2014 traded at 25.5. That company said Friday it would not be able to post its quarterly figures on time but did not specify why.

James River Coal Co.'s 9 3/8% notes due 2012 were "a bit up," a trader said, at 78.25.

Sara Rosenberg contributed to this article.

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