Movie Gallery bank debt, bonds jump on numbers; airlines up on results also

By Paul Deckelman and Sara Rosenberg

New York, May 11 - Movie Gallery Inc.'s bank debt, bonds and shares all put on a bravura Oscar-worthy performance Thursday after the sometimes troubled Dothan, Ala.-based Number-Two U.S. home video rental store operator announced stellar first-quarter numbers that proved investors were right to be optimistic these past couple of days about what the latest financials would show.

Also flying high were the bonds of bankrupt air carriers Northwest Airlines Corp. and Delta Air Lines Inc., after those companies shrugged off continued high fuel prices and reported favorable monthly operating numbers.

And Owens Corning - whose bonds zoomed 15 points on Wednesday on the news that the bankrupt Toledo, Ohio-based insulation maker had reached agreement in principle with its asbestos claimants and other creditors on a reorganization plan - continued upward Thursday by another five or six points, traders said.

Other bankrupt asbestos-challenged names such as Armstrong World Industries Inc. and Federal-Mogul Corp. likewise moved higher on the momentum from the Owens Corning deal.

Bank debt traders said that Movie Gallery's term loan B rallied into the high-90s context, pushed up by the strong earnings. A trader said that the paper closed out the session quoted at 96.5 bid, 97.5 offered, up from previous levels of 94.5 bid, 95.25 offered. Earlier in the day, the bid had gotten as high as 97.5, bounced back in to 96.25 and then settled at 96.5

Movie Gallery's 11% notes due 2012 "were pretty volatile," said a bond trader. "The earnings were a big surprise, apparently" - at least to Wall Street analysts, though not to bond holders who had steadily taken those bonds solidly higher over the previous several sessions, expecting that the company would show considerably improved results.

He saw those bonds - which had finished at around 62 bid, 64 offered on Wednesday - jump "five to seven points right off the bat" and trade up to 73. Then he saw them retreat to as low as 68.5 bid, 69.5 offered - before coming off those intraday lows later in the session to end at 72.5 bid.

"It was a pretty wild ride today [Thursday]," he said, with in excess of $150 million bonds changing hands.

For the quarter, Movie Gallery reported total revenues of $694.4 million, up sharply from total revenues of $233.8 million in the same period last year.

Net income for the quarter totaled $40.3 million ($1.27 per diluted share), compared to net income of $18.4 million (58 cents per diluted share) in the first quarter of 2005.

And adjusted EBITDA was $116.8 million for the first quarter compared to adjusted EBITDA of $39.5 million last year.

On their conference call with analysts following the release of the numbers, company executives said that Movie Gallery has adequate cash and borrowing power to meet its obligations this year, though it is also looking to make changes in its capital structure in preparation for next year when more stringent credit facility financial covenants - temporarily relaxed by its lenders for the remainder of this year - go back into effect.

They also said that they would be open to a possible combination with the industry's top player, Dallas-based Blockbuster Inc. - and that such a union might not necessarily run afoul of federal antitrust restrictions, given recent changes in the industry that have empowered other competitors (see related story elsewhere in this issue).

Movie Gallery's Nasdaq-traded shares soared $1.62 (51.27%) to $4.78 - and at one point were as high as $5.35, up more than two dollars from Wednesday's finish - on heavy volume of 39 million shares, nearly 16 times busier than usual.

Owens Corning keeps climbing

Elsewhere, Owens Corning's 7½% notes due 2018, which on Wednesday had jumped about 15 points on news of the company's proposed settlement with its creditors, pushed as high as 122.5 bid Thursday before dropping back to end at 120 bid, 122 offered, about a 5 or 6 point pickup.

Fellow asbestos-challenged bankrupt Armstrong's bonds jumped four points on the day to 88 bid, 90 offered, while Southfield, Mich.-based auto parts maker Federal-Mogul's notes were 1½ points higher at 64.5 bid, 65.5 offered.

In the bank loan market, Lancaster, Pa.-based floorcovering maker Armstrong World Industries' paper rallied by another couple of points during Thursday's session as positive sentiment over the Owens Corning reorganization agreement continued to incite significant gains, according to a trader.

Armstrong's loan closed out the day quoted at 88 bid, 89 offered, up from Wednesday's levels of 84 bid, 85 offered, the trader said.

On Wednesday, Owens Corning had announced that its key creditor groups agreed on the terms of an amended Chapter 11 plan of reorganization, which if confirmed, could lead to Chapter 11 emergence sometime this year. The company has been in Chapter 11 since 2000.

Under the Owens Corning agreement, bank creditors will receive a full recovery of $2.276 billion in cash, including interest calculated as of March 31 and continuing to accrue through the effective date. Non-bondholder senior and junior unsecured creditors will receive about $249 million in cash. And, bondholders will receive equity and asbestos claimants will receive cash and, if the FAIR Act - setting up a national asbestos claim trust fund mechanism - does not become law, some equity.

On the heels of this announcement, Armstrong's bank debt had rallied on Wednesday from 80.5 bid, 81.5 offered to 84 bid, 85 offered.

However, even before that news hit the market, Armstrong's loan had been on the rise, jumping 4½ points on Tuesday to the 80.5 bid, 81.5 offered context from 76 bid, 77 offered. At that time, sources had attributed the rise to speculative rumors.

Delta higher

A trader saw Delta Air Lines' bonds like its 8.30% notes due 2029 "up a couple" of points at 29.5 bid, 30 offered, while Northwest's bonds, like its 7 7/8% notes due 2008, were at 50 bid, 52 offered, also several points higher on the day.

A source at another desk also saw the latter bonds up about two points, but pegged them at 52 bid, 54 offered.

The first trader attributed the rise to "better monthly operating numbers" that the two airlines were reporting to the U.S. Bankruptcy Court in New York - where they each filed for protection on the same day, within hours of one another, last fall.

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