Blockbuster weakens on numbers; American Axle, Visteon end mixed; Dean firms despite downgrade

By Stephanie N. Rotondo

Portland, Ore., May 13 - The distressed debt market was "definitely better, better, better," a trader said on Thursday.

However, he noted that in "the last three hours, bids started to get hit," resulting in losses for some credits.

Blockbuster Inc. announced its first-quarter results after the market closed Thursday. Leading up to the release, the company's bonds maintained their Wednesday levels. But once the numbers came out, sources saw the bonds starting to lose ground.

In the autosphere, things were generally mixed. American Axle & Manufacturing Inc.'s debt was one of the more active issues, though sources couldn't agree if the bonds were unchanged or better. Visteon Corp. meantime wrapped up the day unchanged to worse.

And Dean Foods Co. received a downgrade in relation to its liquidity rating. But the news did little to hurt the company's notes, which closed out the session with a firmer tone.

Blockbuster weakens post-earnings

Blockbuster's debt held its ground in the lead up to the company's earnings release, but then lost some ground in aftermarket dealings, according to a market source.

The source saw the 9% notes due 2012 at 21 bid, 22 offered most of the day. That level was about the same as was seen on Wednesday.

However, once the market closed - and Blockbuster announced its quarterly results - the notes slipped to 19 bid, 20 offered.

Another trader had also seen the notes around the 22 area during business hours.

The Dallas-based movie rental chain posted a net loss of $65.4 million, or 33 cents per share, for the quarter ending April 4. That compared with net income of $27.7 million, or 12 cents per share, the year before.

Analysts had expected the loss to be around 14 cents per share.

Total revenue fell to $939.4 million from $1.09 billion in the first quarter of 2009 and same-store sales declined by 7.8%.

Blockbuster finished the quarter with $109.9 million in cash and equivalents. Free cash flow was negative $54.8 million.

Building a competitive advantage

"During the first quarter we continued progress to recapitalize our business," stated Jim Keyes, chairman and chief executive officer, in the earnings release. "We have had encouraging discussions with both financial and strategic partners and expect to have additional details to report by our annual stockholders' meeting in late June.

"In spite of competitive challenges, we experienced better domestic rental same-store comparables trends and achieved a number of goals to establish a significant competitive advantage going forward," he added. "Most important was our success in securing agreements with key studio partners to ensure our customers receive day-and-date, cross-channel access to hot new releases. We now have a 28 day rental advantage on nearly 50% of major new releases."

Blockbuster has struggled of late with the advent of On Demand and movie rental kiosks, such as RedBox. Rival Movie Gallery Inc.- which filed for bankruptcy earlier this year for the second time in three years - recently announced it was shuttering all of its stores. The problem, as many market players see it, is the so-called brick-and-mortar business model. As more and more consumers gravitate toward the internet or more convenient rental methods - such as RedBox or NetFlix - the company's market share has deteriorated.

But with the closure of Movie Gallery, that leaves Blockbuster as the sole major chain movie renter. And that could work in the company's favor, at least in management's opinion.

"We believe Movie Gallery store closings could favorably affect hundreds of Blockbuster locations," said Tom Casey, chief financial officer, in the release.

Still, Casey noted that challenges remain.

"We expect the next 12 to 18 months will remain challenging," he said. "For the full year of 2010, we remain focused on the following financial initiatives: lowering our debt service costs; aggressively reducing operating expenses; preserving liquidity through operational efficiencies; and focusing on improving top line performance."

Autos end mixed

The automotive sector was mixed during Thursday trading, according to traders.

A trader said American Axle & Manufacturing's 5¼% notes due 2014 were "pretty active," around the 87¼ mark. He deemed that "lower than last week, but kind of unchanged this week."

Another source pegged the issue at 86½ bid, 87½ offered, up from 85½ bid, 86½ offered earlier in the week.

The first trader also saw Visteon's debt dipping about half a point to a point on the day. He quoted both the 8¼% notes due 2010 and the 7% notes due 2014 at 114 bid, 114¼ offered.

But another trader called the bonds unchanged at 114 bid, 115 offered.

There has not been any news out on American Axle since the company announced earnings on April 30. Visteon, however, made headlines on Wednesday, after the bankruptcy judge overseeing its case denied a motion put forth by shareholders in which they requested the opportunity to present competing reorganization plans.

"Think the real story on Visteon is that not only did the judge deny the equity committee's motion to terminate exclusivity, he denied the motion to appoint an official equity committee and motion to appoint an examiner," said a market source who wished to remain anonymous. "The judge seemed to ridicule the analysis conducted by the equity committee's expert witness and seems very supportive of the debtor's plan.

"The train is leaving the station with the disclosure statement hearing scheduled for May 24th. In essence, the equity was shot down."

Dean firms despite downgrade

Dean Foods' debt finished the day up about a point, according to market sources, even as Moody's Investors Service cut the company's speculative grade liquidity rating.

A trader called the 7% notes due 2016 "pretty active" around 941/4. At another desk, the bonds were pegged at 94 bid, 94½ offered.

Moody's dropped Dean's liquidity rating to SGL-3 from SGL-2, citing the company's weak first quarter performance. During the quarter, the Dallas-based food and beverage company saw its cash from operations decline by 61%, while leverage climbed to 4.43x from 4.16x.

The rating agency also expressed concern about tight covenant issues related to its existing credit facilities.

"The company is facing pressures on its profit margins in fluid milk due to retailers using private label milk products to drive retail traffic by selling it at little to no profit margin, widening the pricing gap at retail between Dean's branded product and store brand milk," Moody's said in a statement.

"This is causing a mix shift from Dean's more profitable branded business to a heavier demand for private label milk for which it earns substantially lower margins. Moreover, retailers are demanding price concessions from suppliers like Dean for their private label supply, further squeezing the private label margins.

"Dean does not believe that this price behavior is sustainable in the long run, but also acknowledges that there appears to be no end in sight as of now."

Broad market mostly better

The broader marketplace was reasonably stronger, traders reported.

First Data Corp.'s 10.55% notes due 2015 were unchanged to "maybe up 3/8" at 85 7/8, a trader said. He added that there was "a ton of trading" in the issue.

The trader also saw the 9 7/8% notes due 2015 at 891/2, a gain of about half a point.

MGM Mirage's 6¾% notes due 2012 were also half a point better at 931/2, he said.

But not everything firmed with the market. A market source said Sbarro Inc.'s 10 3/8% notes due 2015 fell more than 2 points to end at 80½ bid.

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