Blockbuster boosted by stronger earnings; Constar slips, recovers slightly; Masonite loan firmer

By Stephanie N. Rotondo

Portland, Ore., May 15 - During a firmer trading session in the distressed arena, Blockbuster Inc. released its first-quarter results Thursday, which showed a better-than-expected profit.

Analysts had expected 16 cents per share profit, but the movie rental chain surprised many by reporting 20 cents per share income. Investors reacted positively to the figures, and the company's debt gained about a point on the day.

On the other hand, Constar International Inc.'s numbers - also reported Thursday - were not as good. Traders said the bonds were weaker post-numbers but recovered slightly after what was deemed a "positive" conference call.

Masonite International Inc. also released its first quarter earnings Thursday. The company's term loan edged up during trading. But, according to one trader, the gains had nothing to do with the numbers.

Overall, the junk sector ended on a firmer note after losing some ground in the previous sessions. Still, trading action was not at its peak.

"The day was kind of useless," one trader said. "It was really that boring. [There was] nothing of any real joy."

Blockbuster helped by results

Blockbuster reported its first-quarter results Thursday, and the numbers pleasantly surprised the marketplace.

A trader called the 9% notes due 2012 "a little better and active" on the numbers, quoting the debt around 82.5, up as much as a point on the day.

Another trader, who said the company's financials were "good," pegged the paper at 82.5 bid, 83 offered from 81.5 bid, 82.5 offered previously. A market source saw the notes three-quarters of a point better at 82.5 bid.

Blockbuster's term loan B also gained some ground during the session, according to a trader.

The term loan B was quoted at 95 bid, 96½ offered, up from Wednesday's levels of 94¼ bid, 95¾ offered, the trader said.

Net income increased to $45.4 million, or 20 cents per share, which was about 4 cents more than analysts had expected. The company attributed the better figures to higher rental pricing and cost cutting. Meanwhile, revenue fell 5.4% to $1.39 billion due to store closings or sales.

During a conference call, Blockbuster chief executive officer James Keyes said the company was still considering pursuing Circuit City and hoped to make a decision soon.

Blockbuster originally offered Circuit City $6 to $8 per share to take over the electronics store. Management rebuffed the offer, stating that Blockbuster could not afford to make such an offer. However, Mark Wattles, a Circuit City shareholder, railed against the company, stating that it was reasonable to give Blockbuster a chance to pursue the offer - especially as billionaire investors Carl Icahn said he would finance the deal if Blockbuster in fact could not afford it.

Blockbuster is a Dallas-based movie rental chain.

Constar bonds slip, recover

Constar International also released its first-quarter figures Thursday. According to one trader, the company's debt slipped and then attempted a mild recovery.

The numbers looked bad," he said. As a result, the bonds began to slide. But then the company held its conference call, which the trader deemed as "positive." On the back of the call, the bonds began to creep back up, though still ended down slightly.

The trader quoted the 11% notes due 2012 at 58 bid, 60 offered, down 1 point.

At another desk, a trader called activity in the name "reasonably mundane, maybe weaker." He said that while the debt "drifted a little bit, not as much traded as I would have thought."

The trader pegged the 11% subordinated notes at 58 bid, 59 offered and the floating-rate notes due 2013 at around 87.5 bid, though he added that the latter did not trade.

For the first three months of 2008, Constar reported consolidated net sales of $213.4 million, versus $212.7 million in 2007. Still, the company showed a net loss of $7.5 million, compared to a loss of $6.1 million the year before.

"Due to macroeconomic conditions, especially high gasoline prices, our customers have experienced weak demand in the convenience store and gas station distribution channels, which is where a high percentage of PET soft drink packaging is sold. This negatively impacted our soft drink sales in the quarter; however, this weakness was only slightly worse than what we expected based on recent declines in the soft drinks market," said Michael Hoffman, president and chief executive officer of Constar, in a press release.

Constar is a Philadelphia-based producer of PET packaging products.

Masonite loan buoyed by earnings

Masonite International's term loan also traded up following the release of earnings. However, it was not because the numbers were good, but rather because people are banking on an amendment being necessary soon, according to sources.

The term loan was quoted at 92 bid, 93 offered, sources said. By comparison, on Wednesday, one trader was quoting the paper at 90 bid, 92 offered and a second trader was quoting it at 91 bid, 92 offered.

For the latest 12 months ended March 31, Masonite's adjusted EBITDA declined by 8.9% to $290.9 million from $319.4 million for the 12 months ended Dec. 31, 2007.

The company's net debt to trailing 12 months adjusted EBITDA ratio was 6.71 times at March 31, compared to 6.00 times at Dec. 31, 2007, and the covenant maximum is 7.00 times - meaning they're pretty close to running into compliance trouble here, a market source explained.

In addition, the company's cash interest coverage ratio was 1.76 times at March 31, compared to 1.91 times at Dec. 31, 2007, and the covenant minimum is 1.65 times, so they're pretty close to non-compliance here as well, the market source continued.

"They're possibly going to break covenants and will need an amendment. The economy isn't going to get any better for them in the next six months. On average, for an amendment, pricing increases 200 basis points and lenders get a 50 bps fee," the source remarked, adding that investors are probably buying into the term loan now so as to capitalize on the potential for extra pricing, which is the why the loan traded higher Thursday.

For the first quarter, the company's sales were $464.4 million, a decline of 18.4% compared to sales of $569.4 million in the first quarter of 2007, operating EBITDA decreased 36.5% to $46.7 million from $73.5 million last year, and adjusted EBITDA declined 34.7% to $53.5 million from $81.9 million last year.

"Continued volume weakness resulting from the ongoing downturn in the U.S. housing market negatively impacted our first-quarter results," said Fred Lynch, Masonite's president and chief executive officer, in a news release.

"We continue to take aggressive actions to right size our business, both in terms of capacity and staffing levels, while simultaneously driving operational efficiencies, reducing controllable costs, and effectively managing our cash. These actions combined with our increased focus on innovation, are designed to position the company for great success when the market rebounds."

Masonite also announced that following the end of the first quarter, it borrowed the remaining $236 million available from its $350 million senior secured revolving credit facility.

The company said that although there is no immediate need for the funds, in light of current financial market conditions, the draw was made to provide it with greater financial flexibility.

Masonite is a Tampa, Fla.-based manufacturer of residential and commercial doors.

Broad market mostly better

Delphi Corp.'s bonds were stronger, a trader said, though there was no news to prompt the move. He placed the bonds generically in the low-40s, while another source called the debt up 1 point to 40 bid.

E*Trade Financial Corp.'s 8% notes due 2011 "continue to move up," the trader said. He pegged the bonds around 93, while the 7 3/8% notes due 2013 and the 7 7/8% notes due 2015 closed at 87 bid, 88 offered.

Another trader also saw E*Trade's 8% notes at 93 bid, 95 offered.

Idearc Inc.'s 8% notes due 2016 gained another 1 to 1.5 points, a trader said, to end around 73.

Meanwhile, Trump Entertainment Resorts Inc.'s 8½% notes due 2015 slipped half a point to 60.5. Among other names in the gaming sector, Harrah's Operating's 10¾% notes due 2016 "moved up pretty smartly" to 87 3/8 bid, 87.5 offered. He noted that the bonds had been languishing around 86 for some time.

Claire's Stores Inc.'s 9 5/8% notes due 2015 traded up to 58 7/8, a trader said, though he added there were only small trades during the session.

Sara Rosenberg contributed to this article.

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