Blockbuster blasted as it warns of possible liquidation; Dynegy bonds off on Blackstone news

By Paul Deckelman and Sara Rosenberg

New York, Aug. 13 - Blockbuster Inc.'s bonds, as well as its shares, were soundly beaten down on Friday after the embattled Dallas-based movie-rental company - even as it announced that its bondholders had given the company more time to come up with a solution to its debt problems - warned in a regulatory filing that it could eventually be forced to liquidate if things don't work out.

The company also said that its second-quarter net loss widened from a year ago, as revenue slid, with both key numbers coming in worse than Wall Street had expected,

Traders saw Dynegy Inc.'s bonds fall sharply, on very heavy trading - even as the Houston-based power generator announced that it had agreed to be taken private by Blackstone Group, LP in a $4.7 billion deal, news which caused both Dynegy's shares and its bank debt to rise.

Even though the $4.7 billion figure includes debt assumption, traders theorized that the bonds headed south because much of that bond debt is not protected with any change-of-control put provisions, freeing Blackstone of any obligation to put cash up front to buy out the bondholders.

Elsewhere, American General Finance Corp.'s bonds continued to languish around the lows which they hit earlier in the week on the news that troubled American International Group Inc. had sold a controlling stake in the money-losing consumer finance company - and investor fears that the new owners may try to restructure its $17 billion of debt on unfavorable terms.

Blockbuster gets bombed

A trader said that Blockbuster's bonds "took a wild ride today," after the company reported a wider second-quarter loss and warned that it could eventually be forced into liquidation if efforts to refinance or restructure its debt do not succeed.

He saw its 11¾% senior secured notes due 2014 in a swoon to the tune of 12 points on the session, plummeting to 47 bid, 48 offered. He noted that those bonds had traded on Thursday around 60 bid, "so it was off a dozen points - Ouch!"

He also saw Blockbuster's subordinated 9% notes due 2012 as having "probably collapsed as well" down from the 5 bid, 6 offered context where they had recently languished.

Blockbuster "had a couple of million bonds trading" on an otherwise dull Friday, he said.

Another trader, who saw the Blockbuster 113/4s in the mid-50s on Thursday saw them trading Friday as wide as 45 bid, 49 offered, before coming in to around the 46¾ bid area around the day's end, calling that "down a good 5 or 6 points, or even more." He saw the 9s around 5 bid.

At another desk, a trader saw the 9s having dropped from 5 to 3 - a huge drop, percentage-wise - but saw "only small sizes trading."

He also saw the 113/4s trading at 48 bid, although there too, he saw a lot of small pieces trading. Earlier in the week, he said, the latter bonds hovered at 61 bid, 62 offered.

Blockbuster took it on the chin after the company warned in its 10-Q filing with the Securities and Exchange Commission that if its current efforts to restructure its debt, either within the courts or outside them, are not successful and if it cannot line up the debtor-in -possession financing it would need to operate while restructuring under Chapter 11 - and the company had previously raised the possibility of a Chapter 11 filing in order to reorganize - then it might instead have to liquidate under Chapter 7 of the Bankruptcy Code, disposing of its remaining assets and going out of business.

That would be a bitter end for a company which at one time held a dominant position in the movie rental business, way back in the days of clunky VHS tapes, before the rise of such pesky upstart competitors who grabbed the lead in renting the slimmer DVDs as Netflix and the ubiquitous RedBox rental kiosks operated by Coinstar Inc. Those more technologically adept rivals made obsolete Blockbuster's once far-flung network of full-line rental stores - now shrinking day by day under the onslaught of new closings.

Blockbuster's warning that it might eventually be forced to follow in the footsteps of its only real rival in the mortar-and-brick rental stores business, Movie Gallery/Hollywood Video - which went into bankruptcy for the second time in three years earlier this year and which has already shuttered most of its own stores and is in the process of liquidating the rest - overshadowed the company's relatively favorable news - that investors holding about 70% of its secured bonds agreed to give Blockbuster more time to try to get its financial house in order.

They agreed to extend until Sept. 30 a forbearance agreement under which they will not move to enforce their rights triggered when Blockbuster elected not to make a $42.4 million interest payment on the notes that was due July 2. At that time, the bondholders elected to give Blockbuster until this week to try to restructure its more than $1 billion of debt, and they have now given it additional breathing room. Blockbuster said it was in talks with noteholders as well as strategic parties to try to restructure its balance sheet and acquire additional capital.

Blockbuster also reported second-quarter results - numbers which showed the company's deterioration versus where it was a year ago, and which were worse than analysts were expecting.

In the quarter, its loss widened to $69 million, or 32 cents per share, from $37 million, or 21 cents a share, a year earlier. Wall Street had been expecting about a quarter per share of red ink. Revenue meantime fell to $788 million from $982 million, versus expectations of around $840 million in sales.

Blockbuster's shares - trading over- the-counter via the Pink Sheets since their de-listing some weeks ago by the New York Stock Exchange - were down a nickel, or 25%, to end at 14 cents per share. Volume of 11 million shares was more than twice the norm.

Dynegy deal a debt debacle

The other big story of the day, said traders, was the slide in the bonds of Dynegy, a Houston-based producer and seller of electric energy, capacity and ancillary services, which headed south following the news that the company is being acquired by Blackstone in a transaction valued at approximately $4.7 billion, including the assumption of existing debt.

Dynegy "really got beat up," said one trader, who saw the company's 7¾% notes due 2019 down 4 points on the session at 64½ bid, while its 8 3/8% notes due 2016 dropped to 76½ bid, down 2½ points on the session. "Those were two of the most active issues of the day," he said.

"A lot of Dynegy traded," a second trader agreed, pegging the 73/4s at 64¼ bid, 64½ offered, versus levels around 71 bid early in the day, before the market fully absorbed the impact of the news about the planned big leveraged buyout deal by Blackstone. He had seen those same bonds on Thursday at 68¼ bid, 68¾ offered, and said they opened Friday :"around a 691/2-70-71 range," before starting to come down as bondholders realized that their initially favorable take on the news might be mistaken.

Dynegy "went on a wild ride," yet another trader said, with "hundreds of millions traded today" across the company's capital structure. He saw the 73/4s fall 5 points to 64 bid, 65 offered, while its 7½% notes due 2015 dropped 2 points to 79 bid, 80 offered "on huge volume."

In explaining the drop in the company's bonds in such active dealings, one of the traders said that as he was reading the indentures of the various issues of Dynegy bonds, he could not find any change-of-control puts, which would normally obligate a buyer of the company, such as Blackstone, to agree to take those bonds out at a price of 101 at the option of the bondholders, well above where all of the Dynegy bonds have lately been trading.

"I was a little surprised to see that there was no change-of control-put," he said, no doubt mirroring the feelings of some bondholders who finally, if belatedly, read the fine print in their notes' indentures. Realization that there will be no buyback of the bonds at exalted levels might well have caused many bondholders to shed them.

The trader also suggested that, as is typical with leveraged buyouts where the acquirer only makes a limited equity commitment, "Blackstone is probably going to lever it up to buy it" - raising the possibility that an already weak balance sheet could see more debt piled on to fund the buyout. LBO deals have recently been making a bit of a comeback in the junk market versus their nearly nonexistent levels over the previous year or two, as witnessed by recent new-deals for companies like TransUnion LLC, Dave & Buster's, Inc., American Tire Distributors, Inc., Michael Foods Group, Inc.. and DynCorp International, Inc.

As disappointed as the bondholders might be with the deal, since Blackstone need only keep paying the coupons on the bonds rather than repurchasing them outright for cash, that's not a problem that worries holders of the company's bank debt. Traders in that market said Friday that Dynegy's strip of institutional debt gained some ground in trading on the Blackstone news. It was quoted by one at 98¾ bid, 99¼ offered, up from 95¾ bid, 96¾ offered, by a second trader at 99 bid, 99¾ offered, up from around the mid-90 context, and by a third trader at 98 7/8 bid, 99 1/8 offered, up from 96 bid, 97 offered.

Dynegy shareholders also loved the deal, even if the bondholders didn't, taking the company's NYSE-traded shares up $1.75, or a dizzying 62.95%, to end at $4.53, slightly above the level at which Blackstone is to buy Dynegy. Volume of 236 million shares was fully 59 times the usual turnover.

Under the terms of the agreement, Dynegy stockholders will receive $4.50 in cash per share, or a total of some $543 million. The transaction is expected to close by the end of 2010, subject to customary closing conditions, including approval by Dynegy stockholders and receipt of regulatory approvals.

As part of the deal, Dynegy will be selling four natural gas-fired assets currently in California and Maine to NRG Energy for approximately $1.36 billion in cash. The power plant deal is sale contingent on the completion of the leveraged buyout, while Blackstone's purchase of Dynegy is likewise conditioned on the concurrent closing of the NRG transaction.

However, closing on the buyout is not subject to any financing conditions, and a fund managed by Blackstone has committed to contribute all of the equity necessary to complete the deal.

. News reports said that the proceeds from the power-plant deal will go back to Dynegy's balance sheet, rather than going into Blackstone's corporate coffers.

American General gyrations continue

Traders saw continued losses in American General Finance Corp.'s bonds, with a trader calling the New York-based consumer lender "active."

He quoted its 6.90% notes due 2017 at 78 bid, 79 offered. He called that 78 level "down another 3 points," on top of the retreat seen in those bonds on Wednesday and again Thursday.

A market source, who also saw the 6.90s as 3 point losers on the day at 78, called the company's 5.20% notes due 2011 down 2½ points at 93½ bid, on brisk trading.

And he saw its 5 5/8% notes due 2011 ending just above 96 bid, down about 3/8 point on the day.

Those bonds had slid badly on Wednesday - as much as 8 points for the 6.90s - and were down again on Thursday, in very heavy dealings, on the news that company parent American International Group Inc. had agreed to sell most of the money-losing unit to Fortress Investment Group LLC - and the speculation among the bondholders and some analysts that the new owner may try to restructure American General's $17 billion debt load on less-than-favorable terms for the company's bondholders.

Fitch Ratings, among others, cautioned that "new ownership and existing management may potentially seek to engage in some type of business reorganization, up to and including a restructuring of the firm's capital structure."

A trader, referring to the apparently highly unpopular Dynegy deal that moved that company's bonds lower on Friday, said that what AIG had done to American General Finance was "another deal that people don't seem to be happy with,."

.The trader said that in Friday's market, "Blockbuster had a decent amount of trading. Dynegy had a huge amount. And there's always a lot of trading in AIG."

Sbarro slides on second-quarter slippage

Elsewhere, Sbarro Inc.'s 10 3/8% notes due 2015 were quoted down by as much as 7 points on the day to end at 711/2, after the Melville, N.Y.-based operator of a chain of Italian-style quick-service restaurants reported lower second-quarter numbers.

In the fiscal second-quarter ended June 27, revenues totaled $76.1 million, down from $80.1 million a year earlier, blaming a decrease in comparable-unit sales of $4.5 million or 6.2% in its restaurants and lost sales from stores strategically closed of $1.4 million, partially offset by sales generated by new stores opened, remodeled or relocated in 2010 and 2009 of $1.9 million.

The company said EBITDA was $6.3 million for the quarter, versus $8.2 million a year earlier, primarily due to the decline in company-owned comparable-unit sales and an increase in commodity costs during the quarter, specifically cheese, partially offset by payroll and other cost savings initiatives.

Sbarro, which has scheduled a conference call next Thursday to discuss its results, said that as of the end of the quarter, it was in compliance with all of its financial covenants.

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