Distressed debt sees more action, slumps anyway; Blockbuster subs dip, seniors rally on filing

By Stephanie N. Rotondo

Portland, Ore., Sept. 23 - Distressed bonds finished Thursday on the weaker side, though traders noted that the losses could have been worse.

"The market started off ugly, but did a pretty good job of coming back," a trader said, adding that bonds were generally either down about a quarter point or unchanged.

There were also fewer new issues coming to market, allowing distressed credits to gain investor attention.

And, investors were obviously paying attention as Blockbuster Inc. announced it had officially filed for bankruptcy. Though the news was largely expected - the company had warned of a filing earlier in the year, the subordinated issue dropped a few points, while the senior notes initially traded down, then back up.

Also active was Rite Aid Corp., which announced earnings before the market bell rang. The numbers disappointed investors, and mounting pressure caused the bonds to fall anywhere from half a point to 1½ points on the day.

Blockbuster slips on filing

After months of restructuring negotiations, Blockbuster filed for bankruptcy on Thursday, giving the company over to the senior noteholders.

"That's been coming for so long; I'm glad it finally happened," said one trader.

The trader said the bonds reacted by weakening several points.

"It's the first bond that I can remember in the last six to seven months that has gone down on a filing," he said.

He placed the 9% subordinated notes around 2 and the 11¾% senior notes due 2014 at 46 bid, 47 offered.

Another trader placed the 9% notes at 2½ bid, 3½ offered - "so down on the day a couple - while the 11¾% notes opened at 49 bid, 51 offered, though they climbed up to 53 bid, 54 offered by the end of business.

At another shop, the 9% notes were placed at 2 bid, 3 offered. Of the 11¾% notes, the trader said they started "down around 50 for a second," and then "somebody lifted them," leaving them 53 bid, 54 offered.

Bankruptcy filing terms

According to the terms of the company's pre-packaged bankruptcy, about 80% of senior noteholders agreed to provide $125 million in bankruptcy financing, which would then be converted to exit financing. Holders of the 11¾% notes will receive all the new equity in the company, while subordinated noteholders and shareholders get nothing.

"I'm not sure how much value there is for the secured holders," said Mary Ross Gilbert, a managing director covering the retail and consumer industries at Imperial Capital.

"They weren't aren't adequately protected and then they are going to get be primed with the debt debtor in possession financing to a certain extent," although approximately $250 million of the 11¾% notes will be "rolled up" into the DIP at a discount and will be second in line to the primary borrowings.

As such, "even the secured class will have unsecured claims for the portion that wasn't covered on a secured basis."

There is also some doubt about whether the restructuring effort will even help the company going forward.

"This restructuring isn't going to make it better," a trader said. "I don't know what could possibly be there that could have value."

Furthermore, he opined, Blockbuster could turn out to have more liabilities than assets.

"On the one hand, it is positive that 'insiders' are willing to add fresh money," wrote Gimme Credit LLC analyst Kim Noland in an afternoon note to clients. "On the other hand, maybe no banks were willing to lend."

Following news of the filing, Moody's Investors Service cut Blockbuster's rating to D from Ca, while Fitch dropped the rating to D from RD.

Blockbuster is a Dallas-based movie rental chain.

Rite Aid fall on earnings

Rite Aid's bonds "didn't do too good at all," a trader said after the company reported its second quarter results for fiscal 2011.

He said the bonds were down 1½ points across the board, with the 9½% notes due 2017 getting "banged the worst." Those notes dropped "a solid 2 points" to 81 7/8 on $25 million to $30 million traded.

The trader added that about $60 million to $70 million total of Rite Aid debt changed hands. Among other issues trading were the 9 3/8% notes due 2015 and the 10 3/8% notes due 2016, which ended around 83¾ and 103¾ bid, 104¼ offered, respectively.

Another trader said the credit was "a few points lower," with the 9½% notes trading the most actively around 82.

For the quarter ending Aug. 28, the Camp Hill, Pa.-based drugstore chain reported a net loss of $97 million, or 23 cents per share, on revenues of $6.2 billion, a 2.5% decline from the year before. Net loss in the second quarter of fiscal 2010 came to $116 million.

Analysts polled by Thomson Reuters had expected to see a loss of 17 cents per share on $6.19 billion in revenue.

Adjusted EBITDA came to $181.2 million.

Breakdown on numbers

In addition to lower sales, Rite Aid said the wider net loss was because of expenses related to the retirement of its $648.0 million tranche 4 term loan due 2015 under its senior secured credit facility.

Also, the company repurchased nearly $94 million of its 8 ½% notes due 2015, added a new $1 billion revolving credit facility due 2015 - replacing a $1.175 billion facility - and issued $650 million of 8% senior secured notes due 2015.

The refinancing and retirements resulted in a $13 million decrease in annual interest expense.

"As we said at the start of the year, we made the strategic decision to invest now in initiatives designed to grow our business long term, including our new wellness+ customer loyalty program and the expansion of our immunization capabilities," said John Standley, president and chief executive officer, in the earnings release.

"While the start up costs of those investments have had a negative impact on our results this quarter, we're excited about the impact we're seeing so far. At the same time, we remain focused on reducing costs and operating more efficiently. Our continued strong liquidity and recent refinancing give us even more runway to deliver on our initiatives."

In the release, Rite Aid also noted that it had revised its fiscal 2011 guidance, forecasting sales to be between $25 billion and $25.4 billion for the year.

Adjusted EBITDA also narrowed to between $875 million and $950 million, which in turn resulted in a total net loss expectation of $400 million to $590 million.

"We were disappointed by [Rite Aid's] second fiscal quarter report - results were weak and it dropped its forecast," wrote Gimme Credit LLC analyst Kim Noland in an afternoon note to clients. "Recent sales and earnings have been disappointing and the only good news is that recent refinancings are keeping the company liquid and extending debt maturities."

Broad market goes south

Elsewhere in the distressed market, NewPage Corp.'s 11 3/8% notes due 2014 were softer around 891/2.

Another market source said General Motors Corp.'s 8 3/8% notes due 2033 closed up modestly at 32 5/8 bid, 33 1/8 offered.

However, another source called GM's benchmark paper "pretty much unchanged" around 323/4.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.