Blockbuster: No Circuit City buyout; Merrill report hurts GM; Harrah's PIKs debt, bonds steady

By Stephanie N. Rotondo

Portland, Ore., July 2 - With the Fourth of July holiday right around the corner, trading in the distressed bond market could have dried up entirely on Wednesday. Luckily, there was plenty of news circulating to avoid that.

First up, Blockbuster Inc.'s bonds gained about 2 points during the session after the company announced it would no longer pursue a Circuit City buyout. According to a prepared statement, due diligence was completed and the results were deemed not in the best interest of shareholders.

Secondly, Merrill Lynch issued a less-than-stellar report on General Motors Corp. in which it was opined that bankruptcy at the U.S. automaker remains a possibility. As a result, GM's debt structure ended the day heavier.

It was not surprising that Harrah's Entertainment elected to choose the pay-in-kind option on its toggle notes; market sources have been predicting the casino operator would do just that for weeks. As the company formally made its decision known in a regulatory filing, the bonds traded actively but were unmoved pricewise.

The bond market will close early Thursday in preparation for the holiday. The market will be closed Friday.

Blockbuster: No Circuit City buyout

Blockbuster's bonds gained ground after the company decided to step away from a buyout of Circuit City.

One trader called the 9% notes due 2012 "not too far off of where they have been" at 84.25 bid, 84.75 offered, but another trader saw the debt gain a couple points to 84.25 bid, 84.5 offered. Another source pegged the bonds at 84 bid, 85 offered, up 2 points.

After completing due diligence, Blockbuster said that it was "not in the best interest of Blockbuster's shareholders to proceed with an acquisition of Circuit City." Blockbuster, a Dallas-based movie rental chain, had first approached the struggling electronics store in February, offering $6 to $8 per share.

In an afternoon report, Gimme Credit analyst Kim Noland wrote that Blockbuster was better off abandoning the deal.

"Despite what management believed were compelling synergies, we think Blockbuster is better off if it remains stand-alone and continues to pursue its marketing and cost cutting plans that have improved recent results," she said.

Among other retail-related companies, Rite Aid Corp.'s new 10 3/8% notes due 2016 traded actively, up "a good solid point from where they came" at 91.5 bid, 92 offered.

GM heavier on analyst comments

An analyst report from Merrill Lynch placed more pressure on General Motors' already-faltering debt.

A trader quoted the 8 3/8% notes due 2033 a 55.75 bid, 56.75 offered, calling that weaker on the day. Another source said there was a "fair amount of trading in the name," noting that the 7.2% notes due 2011 traded as low as 71 during the mid-week session, down from 76 the previous day.

The Detroit-based company's term loan also headed lower, quoted at 81½ bid, 82½ offered, down from 82 bid, 83 offered, a trader said.

According to several news reports, Merrill Lynch released a report on the U.S. automaker Wednesday that claimed a bankruptcy filing was "not impossible." As the U.S. auto market remains weak, Merrill said that GM needed more cash than it currently has to maintain the status quo. GM responded by saying that it has adequate liquidity to get through 2008 and has other options should the market continue to deteriorate.

On Tuesday, GM reported an 18.2% decline in sales year over year, although it held onto its reign over Toyota. The market had been expecting a bigger slip in sales.

In other automotive-related names, Delphi Corp.'s bonds were called "a little better" at around 19. Visteon Corp.'s 7% notes due 2014 were seen "off a couple points" at 52, though the 8¼% notes due 2010 were "not that much different" at 86 bid, 87 offered.

Harrah's chooses to PIK

Casino operator Harrah's said in a filing with the Securities and Exchange Commission Wednesday that it elected to use its PIK option on its toggle notes. However, the news had little effect on the debt.

A trader said the news "didn't knock the bonds down all that much," pegging the 10¾% notes due 2016 at 81.5 bid, 82 offered. He noted that the bonds traded as high as 82.75 during the session.

At another desk, a trader said the company's issues "looked unchanged," its 5½% notes due 2010 at 89 bid, 90 offered, its 10¾% notes at 82 bid, 82.75 offered and its 10¾% toggle notes due 2018 at 72 bid, 73 offered.

In the SEC filing, Harrah's said that it chose to pay in kind on its February 2009 coupons. The company plans to use the saved cash for general corporate purposes. It also said that it is looking at retiring debt in the future.

Las Vegas-based Harrah's has scheduled an Aug. 8 conference call to discuss its second-quarter results.

Broad market softer

Just one day after Dollar Thrifty Automotive Group Inc. said it would miss its earnings guidance for the year, Avis Budget Car Rental LLC followed suit.

According to a trader, the news put pressure on the sector. Avis' 7 5/8% notes due 2014 were "down a couple points" to 77, while sector rival Hertz Corp.'s 8 7/8% notes due 2014 slipped 1.5 points or more to 89.

The Parsippany, N.J.-based company blamed rising fuel prices for its earnings miss, estimating EBITDA to be $350 million versus levels of $409 million the year before.

Elsewhere in the distressed marketplace, Liberty Media Corp.'s 7¾% notes due 2009 traded around par.

VeraSun Energy's 9 3/8% notes due 2017 ended the day at 52 bid, 54 offered.

A trader said Transmeridian Exploration Inc.'s 12% notes due 2010 were quoted at 78 bid, 78.5 offered "after a week of absenteeism."

Sara Rosenberg contributed to this article.

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