Movie Gallery bank debt eases, bonds idle; Refco bonds climb

By Paul Deckelman and Sara Rosenberg

New York, March 27 - Movie Gallery Inc.'s term loan spent another day grinding lower Monday as investors continued to react to the company's Friday announcement that materials weaknesses were found in its internal controls over financial reporting and that it anticipates facing more financial covenants compliance issues in the future.

However, the Dothan, Ala.-based home video-rental chain operator's beleaguered bonds - which were driven down to closing levels in the mid-40s last week, a loss of some 10 points on the week - were seen mostly steady at those lower levels.

Elsewhere, a trader saw bonds of bankrupt New York-based financial company Refco Inc. higher, although he did not have a ready explanation for the rise.

Calpine Corp. bonds - which last week had been steadily, if mysteriously - rising before topping out on Friday, were once again seeing firmer, although just as had been the case last week, nobody had a clue as to why.

Traders saw Delphi Corp. bonds, and those of its former corporate parent General Motors Corp., a little better, as the bankrupt Troy, Mich.-based automotive electronics manufacturer made a new wage-cutting proposal to the United Auto Workers union. That opened the door to the possibility that Delphi and the union might come to some kind of an agreement - or at least be making measurable progress toward one - by Thursday, the company's self-imposed deadline for having at least the framework for a deal in place, which could head off a company attempt to junk its current contract, an attempt the union has vowed to fight with a strike, if need be.

A bank debt trader saw Movie Gallery's term loan closing out Monday's session quoted at 89 bid, 90.5 offered, down about three-quarters of a point on the bid side from the 89.75 bid, 90.75 offered level that had been seen on Friday.

The fall is still being attributed to the company's 10-K filing on Friday that revealed the finding of four material weaknesses in the company's internal controls: ineffective management review of account analyses and reconciliations; ineffective communication of accounting policy for capitalizing costs and lack of an effective review process; inaccurate or lack of timely updating of accounting inputs for key estimates and assumptions; and ineffective procurement and receiving processes.

As a result of these reporting deficiencies, the company warned that investor confidence in the reliability of its financial statements could diminish, which ultimately could negatively impact market prices for its securities.

In addition, Movie Gallery revealed in its 10-K that it may not be able to comply with some financial covenants for the first quarter of 2007 without further amendments to its credit facility.

The facility had just been amended on March 15 to relax certain financial covenants, including the leverage ratio, fixed charge coverage ratio and interest coverage ratio. However, these covenants are slated to once again get stricter once first-quarter 2007 rolls around.

Following the filing of the 10-K on Friday, Movie Gallery's term loan had dropped a quarter of a point from Thursday's levels of 90 bid, 91 offered.

Since March 16, the day after the company completed its latest amendment process, the term loan has given up about four points as levels have steadily been inching lower because of poor fourth quarter and full-year earnings that were announced last week and the various 10-K revelations.

Movie Gallery's 11% notes due 2012 had fallen as low as 41 bid in initial activity Friday but came off those lows to end the day quoted at most shops at 44 bid, 46 offered - a drop of about two points on the session but 10 points on the week.

In Monday's dealings, those bonds were seen little changed, hanging in around the 44 bid level.

Refco bonds strong

Elsewhere, a trader in distressed notes saw Refco's 9% bonds due 2012 jump to 56 bid, 58 offered, up from levels late last week around 51 bid, 53 offered.

However, he had not seen any fresh news on Refco, once a huge and profitable international brokerage company which was driven into Chapter 11 last October following the revelation that the then-chief executive officer had allegedly secreted several hundred million dollars of bad loans on the company's books.

Since that time the courts have been overseeing the dismantling of Refco's once far-flung empire, with various units being liquidated to meet the claims of former shareholders, bondholders and brokerage customers.

Calpine returns to gains

Calpine's bonds were meanwhile seen firmer Monday - perhaps a resumption of the recent climb seen in the bankrupt San Jose, Calif.-based power generating company's notes.

Those bonds had firmed over most of the past two weeks before coming to a halt Thursday and Friday. Traders were at a loss to explain why anyone would be buying Calpine bonds now, since all of its derivative contracts have long since been settled but the reorganization process has only just begun.

A trader saw Calpine's 8½% notes due 2008 half a point better at 48.75 bid, 49.75 offered.

Another trader allowed that Calpine was "a little stronger" Monday, its 8¾% notes due 2007 up a point at 58.5 bid, 59.5 offered and its 8½% notes due 2011 at 38.5 bid, 39.5 offered, up a point.

A market source at another desk saw the 83/4s up a point at 60 bid.

Exide, Collins higher

In the troubled automotive realm, a trader saw the bonds of Alpharetta, Ga.-based car battery maker Exide Technologies a point better at 74 bid, 76 offered.

Among bankrupt auto related names, he saw Troy, Mich.-based interior components manufacturer Collins & Aikman Corp.'s 10¾% notes due 2011 up a point at 33 bid, 34 offered. Bankrupt Southfield, Mich.-based brakes maker Federal-Mogul Corp.'s bonds were up a point at 42 bid, although he saw no movement at all in bankrupt Novi, Mich.-based vehicle frame maker Tower Automotive.

Delphi, GM up

The trader saw Delphi Corp.'s bonds up about a point on the session at 66 bid, 68 offered, and saw GM's bonds and those of its General Motors Acceptance Corp. financial subsidiary, up a point. He quoted the giant carmaker's benchmark 8 3/8% notes due 2033 at 74 bid, 76 offered, up a point, and also pegged GMAC's 8% notes due 2031 at 93 bid, 94 offered, while its 6¾% notes due 2014 were at 89 bid, 90 offered and its 6 7/8% notes due 2011 were at 91 bid, 92 offered, all a point better.

Another trader called Delphi "maybe half a point better," at levels in the mid 60s, "but nothing really was going on in them - it was just grinding upward."

Another trader agreed that Delphi "was basically unchanged after its news blurb," with the company's 7 1/8% notes due 2029 staying at 67.

While yet another trader agreed that Delphi didn't do much on the news that it had made a revised offer to the UAW - calling for somewhat smaller, slower wage cuts than its original plan - he did see GM's bonds better, probably on the news, with the 8 3/8s up 1½ points at 74.25 bid, 75.25 offered and the GMAC 8s at 93 bids, 94 offered, a ¾ point gain.

GM, Delphi's corporate parent till 1999 and still its largest customer - and Delphi, in turn, is GM's single largest parts supplier - has a vested interest in seeing Delphi and the UAW agree on some kind of plan for Delphi to be able to cut its heavy labor costs without provoking a costly strike by its more than 20,000 UAW members, since a labor shutdown would throw GM's own production schedules into turmoil at a time when the carmaker is trying to regain its own financial footing.

GM, Delphi and the union have been negotiating for months, with Delphi insisting that it must cut its labor costs - estimated at $27 per hour per worker on average in straight pay, and nearly $50 per hour more in healthcare and other benefits - if it is to be able to restructure its finances and survive as a company.

After Delphi filed for Chapter 11 protection last October, it quickly proposed cut in the average salary to about $9.75 per hour - an idea vehemently rejected by the union. Delhi said that if it could not reach a consensual agreement with the union and its former parent - whom it blames for its pricy labor cost structure - it would ask the court to allow it to throw out the negotiated contract and unilaterally impose a lower wage structure. The union threatened a strike. Delphi has since back off several deadlines - but now says at least a framework of an agreement must be in place by Thursday, or it will go to court Friday to junk the union contracts.

Delphi's new proposal would drop the wage rate gradually to about $16 per hour, according to Monday's editions of the Detroit News. The paper said the plan envisions likely assistance from GM.

There was no immediate response from the union. Officials from its Delphi and GM locals are scheduled to meet on Tuesday with executives of the two companies to discuss the special attrition program unveiled last week by Delphi, GM and the UAW, which would offer GM-funded buyouts to some 13,000 of Delphi's 34,000 hourly workers, while GM itself was concurrently offering buyouts - albeit on a much different financial structure - to its own more than 100,000 hourly employees, most of whom are not expected to give up their jobs even for a tempting lump-sum payment.

Enough workers may take the bait at both companies, though, to allow them to bring their labor costs down. That is critical for Delphi, which says it pays its employees far more than other auto-parts suppliers because it inherited such a labor cost structure from its carmaker ex-parent when it was spun off, and important also for GM, which lost more than $10 billion last year and which is losing market share to other carmakers partly because of the labor costs built into the production of every vehicle which rolls off its assembly lines.

Meantime, GM could announce details Tuesday on a wave of job cuts among its 36,000 salaried technical and professional workers. The carmaker - which has announced plans to eliminate 30,000 hourly jobs by 2008 - has also said that it will cut up to 7,000 salaried positions this year, although it has given no details yet. One facility that could be hard hit is GM's technical facility in Warren, Mich., where more than 14,000 research, engineering and design employees work.

GM on Monday said that its U.S. sales outlook for 2006 is "challenging" and its first-quarter market share will be slightly lower, at about 24%, due to aggressive competition. But its officials said that the carmaker would stick with a new pricing strategy that lowered the regular prices on most of its models and that seeks to avoid the kind of blowout discount programs GM put in place last summer that ended up selling a lot of cars - but at a very low margin that did not do much to help its profits picture.

GM said sales of its redesigned vehicles, including the Chevrolet Tahoe SUV and the Chevy Impala are strong (the latter is a European-styled mid-size sedan - not to be confused with the iconic, full-sized classic American sedan that was Chevy's sales mainstay back in its glory days from the late 1950s right up through the 1980s). Sales of new GM vehicles rose 23% in the first two months of this year versus a 7% drop for its older vehicles.

Also in the automotive area, a trader saw GM arch rival Ford Motor Co.'s 7.45% notes due 2031 up ¾ point at 74.25 bid, 74.75 offered, and saw the 7% notes due 2031 of Ford's credit arm at 88.5 bid, 89 offered, half a point better. Former Ford parts unit Visteon Corp.'s 8¼% notes due 2010 were half a point better at 82.5.

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