Foamex bonds 'going crazy;' Flyi paper flies on settlement with UAL; Tower rises

By Ronda Fears

Memphis, April 19 - Distressed debt traders reported they were getting back to more normal flows Wednesday as the market was resurrected after a lull during the religious holidays over the past week or so, even though the Jewish Passover festival does not end until Thursday.

"The market was so quiet over the Easter period and the Jewish holidays," one trader in New York remarked. "The apathy is finally subsiding."

Foamex International Inc. was by far the front runner in heading the day's business with its 10¾% bonds due 2009 rocketing upward by 20 to 25 points on the day in anticipation of blow-out earnings results.

"The [Foamex] bonds were going crazy," a trader said, adding that there was heavy buying in the paper late into the day. He pegged the bonds well after the close at 75 bid, versus ending Tuesday at 50 bid, 55 offered.

"The earnings are coming out directly" and are expected to be very pleasing.

Bond traders are looking for more evidence of a turnaround that showed up in Foamex's previous quarterly results. For the quarter ended Jan. 1, the Linwood, Pa.-based maker of foam cushioning for the bedding, furniture and automotive markets had posted net income of $18.9 million compared with a net loss of $49.6 million for the quarter ended Oct. 2, with a gain in revenues to $339.6 million from $322.2 million.

Foamex shares nearly tripled in trade Wednesday. The stock (Pink Sheets: FMXIQ) gained 47 cents on the day, or 188%, to close at 72 cents.

Earlier this month, Foamex, which filed bankruptcy last September, asked for a 150-day extension of its exclusive periods to file a plan of reorganization. An ad hoc committee of senior secured noteholders objected to the request.

Flyi seen settling with UAL

FLYi Inc. bonds spiked upward 7 to 10 points during Wednesday's session on word that it had reached a settlement with UAL Corp., parent of United Airlines Inc., to the tune of $750 million, a bond trader said.

The 6% issue, a convertible bond that now trades like any other distressed paper as the equity option is essentially worthless, traded as high as 25 on Wednesday from closing out Tuesday at around 15 to 18, the trader said. He pegged the bonds easing back at Wednesday's close to 22.5, however.

"Yesterday, there was a settlement with UAL for $750 million," a FLYi bond trader said.

FLYi has been wrangling with United since UAL filed for bankruptcy in December 2002. From 1989 to 2004, FLYi, then known as Atlantic Coast Airlines Holding Corp., was a feeder carrier for United. The two airlines never came to terms and FLYi attempted to reinvent itself as low-cost carrier Independence Air in June 2004 before finally succumbing to bankruptcy itself last November.

The battleground was UAL's bankruptcy case where FLYi was initially seeking $1.28 billion in alleged lost profits because UAL terminated its contract; the claim was later struck down to $500 million, but FLYi appealed that ruling. UAL emerged from bankruptcy in February.

In a Monday bankruptcy court filing, FLYi requested court approval of an agreement with UAL Corp. that will allow FLYi a $750 million general unsecured claim and asked for the court's OK to sell the shares of new common stock to be issued to it under UAL's plan of reorganization.

Movie bonds add 5 points

Movie Gallery, Inc. paper got a lift Wednesday and then eased back amid short covering as the stock shot up more than 10% on news that it had hired a firm to restructure its retail lease agreements and was in compliance with its bank covenants. On bond desks, the news was not seen as a huge turnaround event, yet.

Movie Gallery's bank loan and bonds gained on the news, with the bonds trading as high as 50 bid before going home Wednesday at 45 bid, 47 offered versus closing Tuesday in the 48 area, another sellside bond trader said.

"The stock had been under a lot of pressure and saw a pretty decent move on the restructuring news," the trader said.

"There is still a lot of doubt as to whether they will make it. The jury is still out. I'd say the bonds have stabilized."

Movie Gallery paper moves up

A bank loan trader said that the existing loan paper of Movie Gallery had firmed on news that the company has entered into a management agreement with Hilco Real Estate, LLC.

The bank loan trader said Wednesday morning that the company's loans were 90 bid, 91 offered, up a point.

Later in the day another bank loan trader spotted the paper at 90 bid, 92 offered, up from 88 bid, 90 offered on Tuesday.

However another trader, at the close, said that while the paper had definitely moved, it had pretty much ended back where it had started the session, and spotted it closing 89.50 bid, 90.50 offered.

Meanwhile a trader from the junk bond side also told Prospect News that Movie Gallery's bank loan paper had traded to 89 bid, 90 offered, up a couple of points in the morning, and added that it pretty much hung in there from open to close.

However, the source added, the company's 11% bonds due May, 1, 2012 (Caa3/CCC-), "gave up everything, and maybe finished the day off a little from where they started."

On the news the bonds had traded up to 50 bid, but were going out 46.50 bid, 48.50 offered, giving up the "three points that they had gained in the morning."

Movie resets lease agreements

Movie Gallery said Wednesday that it has entered into a management agreement with Hilco Real Estate, LLC.

Under the agreement, the terms of which were not disclosed, Movie Gallery and Hilco will initiate a program to restructure leases at more than 1,100 existing Movie Gallery and Hollywood Video stores. While the list of stores will not be published, this program does not include stores that are associated with the company's previously announced subleasing and downsizing program.

"Hilco has a well established reputation for analyzing portfolios and successfully negotiating on behalf of clients to better position real estate assets and manage occupancy costs," said Movie Gallery chief development officer Keith Cousins.

"This program, together with our previously announced subleasing program, represents our ongoing initiative to restructure approximately 70% of the company's real estate portfolio. We anticipate that these efforts will significantly improve our operating results and enhance shareholder value."

Movie Gallery is the second largest North American video rental company with some 4,800 stores in the United States, Canada and Mexico. Last year, it acquired Hollywood Entertainment Corp.

Movie says it is in compliance

Movie Gallery also said early Wednesday that based on preliminary results for first quarter it expects to be in full compliance with the financial covenants in its senior credit facility for the reporting period ended April 2.

"Contrary to an article published on April 18, 2006, Movie Gallery has not scheduled a call with its bank lenders," the company said in a news release.

The Dothan, Ala.-based video rental chain is schedule to release first-quarter results on or before May 12.

Movie Gallery's bank loan was seen around midday at 90 bid, 91 offered, up a point, a bank debt trader said.

Movie Gallery short covering

Movie Gallery bank paper gained ground on the news and the bonds bobbed around, but traders said the bonds were mainly weaker as holders scrambled to cover short positions in the stock, which zoomed up more than 10% on the day.

"Seems like substantial good news today. Movie Gallery hired an expert firm to cut costs and generate revenues on lease restructuring and now most likely is in compliance with debt covenants," said a buyside trader. "There is a 68% short in the stock, so it will be interesting."

Moreover, he said stronger hands willing to hold were picking up shares along with some short covering. But, he added, there also were some holders selling into the rally.

"It is not like millions of traders are going to flock to this name; it's small. You only trade it to take advantage of the over shorted balance. The short squeeze is never going to draw the kind of pressure that a big name is going to have. Holding a 10% move on the first day of the rally is great," the trader said.

"There are a lot of folks that have been treading water for a month now. Who can blame them for moving on when given the chance? But we are looking for millions of shares to cover. Management sent a signal that Movie Gallery is going to be around. That by itself shook out the weakest hands. Holding this gain will shake out more."

At the very least, another buysider said it seems Movie Gallery has averted the threat of bankruptcy.

"The argument has always been bankruptcy or no bankruptcy," said a fixed income fund manager in Dallas. "If there is no bankruptcy it goes up, and that is what's happening."

Movie timing a big plus

The fund manager in Texas said he thought Movie Gallery management deserved big kudos for the timing of the lease restructuring deal, whether it was intentional or not. But the buyside bond trader said the paper is probably range bound until first-quarter results are posted in mid-May.

"They waited for the big rally in the broad markets yesterday to come out with the news. I like it," he said.

The big move, however, is probably a ways off in the trader's thinking.

"Until earnings are posted this baby will be range bound. Subleasing partnerships are nice indeed, but until an actual sublease partnership is formed with a retail client then the market perceives that as smoke and mirrors. And again, of course, the statement that debt covenants should be met in the first quarter - that was already understood," the trader said.

"But, nonetheless, they're on the right track. I don't think there are a lot of sellers - that might be a mistake - but at the same time, I think a lot of would-be buyers are waiting on the sidelines looking to get in at some point before the [first-quarter] conference call."

Tower seen settling with UAW

R.J. Tower Corp., parent to Tower Automotive Inc., bonds gained 2 to 3 points Wednesday, a bond trader said, on rumors that the troubled auto parts supplier had or was very close to inking a new wage pact with the United Auto Workers.

The Tower 12% bonds due 2013 went out Wednesday at 69.5 bid, he said.

Reports on the wires Wednesday afternoon cited a UAW spokesman as saying that the union was willing to grant Tower Automotive some flexibility on work practices to make its plants more competitive but does not consider current wage levels a major problem for the company.

Novi, Mich.-based Tower Automotive, which filed for bankruptcy in February 2005, reached a deal earlier this month with the UAW covering retiree health benefits and has been in continuing talks with its unions.

Like nearly all the other troubled auto parts suppliers, in and out of bankruptcy, Tower is seeking wage and benefit cuts from its employees, most of which are represented by a union. The company in January asked a bankruptcy judge for permission to reject labor contracts and change retiree benefits after failing to reach deals on cuts with unions.

Unions have authorized a strike should Tower be given the authority to toss out the labor contracts.

Tower hopes to emerge from Chapter 11 protection by the end of the summer.

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