News spurs Delta; analyst says Hines overvalued; Tower makes progress; Transeastern loan stronger

By Stephanie N. Rotondo

Portland, Ore., Jan. 19 - Delta Air Lines Inc. saw a flurry of activity on an otherwise quiet day Friday as the third week of the New Year came to a close.

Despite slight decreases over the week, Delta regained its lost points amid news the company will soon review an increased takeover bid from U.S. Airways Group Inc.

Elsewhere, Movie Gallery Inc. on Friday filed its delayed third-quarter earnings report, showing a wider quarterly loss, and warned of credit facility covenant default danger, saying it would need alternative financing soon.

For months, market participants have been expressing angst about the covenants, and as recently as Tuesday one bond trader referred to the situation as a time bomb ticking, although at that time he was giving the company a fuse of maybe three to six months, or until the current covenant waivers expire.

Meanwhile, Hines Horticulture Inc. was the topic of the day for one analyst, who called the company's senior notes "inappropriately valued." The company recently announced the completion of it asset sales.

Hope seemed lost for Tower Automotive Inc. - one trader said it was "desperate times" for the bankrupt auto supplier - but the parent R.J. Tower Corp. 12% bond due in 2013 made a slight comeback. Though largely inactive, one trader said the bounce could mean good news ahead for the company.

Separately, Transeastern continues to fight its parent company, Technical Olympic USA Inc., on its debt obligations but saw its term loan climb slightly. One trader said the market was waiting to hear the outcome on that brouhaha.

But another trader said it was an overall slow week for distressed bonds, with very little going on in the trades. As the last few weeks have been short, many distressed bond traders are using the time to plan for the year ahead, he said.

"I hope next week will be better," he said.

Delta news spurs activity

Delta stayed in the news Friday, with several announcements from the bankrupt airliner stirring up activity in the company's 8.30% notes. The notes edged up just over 2 points, closing the day at 70.25.

It was reported that Delta would take the revamped bid from U.S. Airways to its board soon. Though the company has repeatedly opposed a merger, management said it was obligated to review the offer made Jan 10 for $10.2 billion, a 20% increase over the original bid on Nov. 15.

The announcement came on the heels of an amended disclosure statement Delta filed with bankruptcy courts. According to court papers, the company is seeking to eliminate a new equity investment rights offering for general unsecured creditors. The amended plan allows for the recovery of 62% to 78% in new common stock, as opposed to the original plan, which called for 63% to 80%.

In other news, Delta also announced it would increase some of its domestic fares by $5, a move in line with other domestic carriers. The systemwide increase comes as oil prices, well below their summer highs, saw a bounce in the market. After dropping in intraday trading to just below $50 a barrel on Thursday, crude oil prices jumped to $51.99 a barrel on the New York Mercantile Exchange Friday, according to the Associated Press.

Movie warns on covenants

Movie Gallery's filing and warning were not altogether news, as one trader remarked, but he said the movie rental company's acknowledgement that it is in danger of defaulting on credit facility covenants could put some pressure on the bonds, once short covering subsides that is.

As it was on Friday, he said he saw nothing in the bonds, and the stock also closed the session unchanged. But, the trader said it has been noted previously that there is a fairly substantial short position in the bonds.

Dothan, Ala.-based Movie Gallery also said in its filing that it has retained turnaround firm Alvarez & Marsal, LLC to immediately fill several accounting and finance leadership vacancies and assist with remediation of deficiencies in its internal controls over financial reporting. The company had delayed the quarterly report due to an ongoing review of its accounting for store lease obligations.

Movie Gallery posted a fiscal third-quarter net loss of $36.1 million, or $1.13 a share, nearly three times worse than the loss of $12.5 million, or 39 cents a share, in the year-ago period, as revenue rose to $583 million from $572.4 million.

The company cited ongoing integration issues from its acquisition of Hollywood Entertainment Corp. in 2005, but onlookers have said Movie Gallery's real pain comes from the emergence and proliferation of online movie rentals by bigger rival Blockbuster Inc. and newcomer Netflix Inc.

In the report, Movie Gallery said it still plans to open about 120 stores for fiscal 2006 but anticipates closing 230 for a net reduction of 110 stores.

Analyst: Hines overvalued

In a report released Friday, one analyst indicated that, based on current land valuations and poor operating results, Hines Horticulture's 10¼% senior notes are "inappropriately valued."

The Irvine, Calif.-based commercial nursery operator recently completed its asset sale, selling its remaining Miami and Northeast operations. The Northeast sale, which included the Danville, Pa.; Utica, N.Y.; and Newark, N.J., properties, totaled $6.7 million. The company is expecting to receive a total of $7.2 million on the sale of 79 acres in Miami to F&J Farms.

The analyst said it was expected Hines would receive a grand total of $29 million to $30 million for all of the sold assets, generating enough liquidity to get the company through the second quarter of 2007. At that time, the analyst believes the company will have depleted all revenues from the asset sales. He said the remaining property values reported by the company were not necessarily accurate.

"There's always been a disconnect on how much their property is worth," he said.

With the sale of the Northeast operations, the analyst also said the company has reduced its earnings power, and, as a result, will only be able to generate $12 million to $15 million in EBITDA in 2007.

"It's been a tough road for these guys," he added.

But despite the gloomy outlook, the notes have fared well, averaging in the 80s range. The analyst, however, said he thought the value should be significantly lower, saying the low 60s would be a fairer value.

"We've never believed the value is there [80s]," he said.

Investors, he said, have looked mostly at the "big coupon" and believe in the bond's value, especially with the asset sales.

"It keeps people interested," he said.

However, the analyst predicts the bonds will dip after the second quarter and reduce to a more appropriate figure.

In Friday's trades, Hines saw no activity, remaining at 89.75.

Tower trades slow, but price up

No trades occurred Friday on Tower's 12% note, but bids did edge higher, with one trader putting it at 8 bid, 10 offered.

On Thursday, the company petitioned the bankruptcy court to amend its debtor-in-possession financing, asking for an extension of the DIP facility and an increase in interest rates. The motion indicated the company would not be able to submit its reorganization plan by the existing DIP expiration of Feb. 2, which would subsequently force the Novi, Mich.-based auto parts manufacturer into default.

Last week, Tower announced that the three sponsors of its reorganization plan had backed out. As the company continues to search for other equity investors, continuing negative trends in the automotive industry caused the bond values to decrease by almost half, sliding to 7 bid, 8 offered earlier this week, from the mid-teens in the week before.

Transeastern term loan stronger

Transeastern, a Florida homebuilding joint venture, saw its term loan strengthen on Friday as the market awaits a proposal from parent company Technical Olympic USA Inc., according to a trader.

The term loan closed the day at 90 bid, 91 offered, up about a couple of points from previous levels, the trader said.

"Everyone is waiting on the proposal regarding the parent's responsibility to the joint venture," the trader explained.

Since late last year, there have been a number of issues regarding Transeastern's bank debt involving Technical Olympic's obligations.

In fact, in December 2006, Deutsche Bank, the administrative agent on the loan, filed suit against Technical Olympic seeking repayment of the Transeastern debt.

Meanwhile, Technical Olympic maintained that it has no obligation to pay any amounts to the debt holders pursuant to the completion and carve-out guarantees issued to lenders.

Technical Olympic is a Hollywood, Fla.-based designer, builder and marketer of single-family residences, town homes and condominiums.

Ronda Fears contributed to this article.

© 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.