Movie Gallery gyrates lower, Blockbuster off too; ServiceMaster deal shelved

By Paul Deckelman and Paul A. Harris

New York, July 3 - The wild ride continued for investors in Movie Gallery Inc. bonds - about the only real activity taking place in an otherwise eerily quiet pre-holiday secondary market Tuesday. Traders did see the company's larger rival, Blockbuster Inc., go down a few points as well, on probably sector sympathy, since both companies are affected by many of the same industry dynamics.

Elsewhere, Wendy's International Inc. bonds were seen lower, in light trading, apparently unimpressed with billionaire Nelson Peltz's claims that his Triarc Cos. Inc. - which also runs fast-food restaurants - would be a "natural, strategic" fit as a possible buyer for the hamburger chain, which is looking for potential acquirers.

Primaryside activity was muted, other than the news which percolated through nearly-empty trading rooms that ServiceMaster Co.'s $1.15 billion two-part bond offering had been postponed, even after having been restructured in order to make it more attractive to potential investors. The mega-deal was the fourth offering in recent days pulled from the forward calendar due to concerns about "market conditions." Last week, a $1.1 billion deal from U.S. Foodservice Inc. and smaller deals for Magnum Coal Co. and Catalyst Paper Corp. also ended up getting spiked.

Movie Gallery horror show continues

Traders said that the only thing that was really going on was the continued turmoil in Movie Gallery's 11% notes due 2012, which on Monday had lost anywhere from 25 to 40 points, depending on whom you were talking too, in busy late-afternoon trading sparked by the company's statement that it had failed to meet some of its senior credit facility covenants and would now have to seek help from its lenders.

"Movie is the only thing going on today," said one trader who quoted the bonds as having fallen from Monday's levels in the upper 60s - and from the mid-70s last week - to new company record-low levels around 13 on Tuesday morning, before coming off those lows to end at 25 bid, 26 offered.

"Beyond that," he said, "nothing was going on."

Another trader agreed that "the only thing of note" was Movie Gallery. He saw the bonds open Tuesday at 20 bid, 25 offered before plunging down to 13 bid, 16 offered and then coming back up into the 20s to close at 22.5 bid, 24 offered.

At another desk, a trader said that "pretty much everything revolved around Movie Gallery," which was easily the most heavily traded high-yield bond of the session.

He saw the bonds having gone home Monday in the 30s, down more than 25 points from their prior levels, and then open Tuesday's action at 24 bid, with the bonds quickly plunging to levels around 16. He saw the bonds come back up as high as 26 bid, 27 offered, before losing a few points to finish as 23 bid, 25 offered - down about a point from the opening, but off a whopping "65 points in just three weeks."

He also said that the Movie bonds were trading flat, or without their accrued interest, since the company had admitted that it was in default on some of its covenants.

Another said that it was his understanding that the company had held a conference call Tuesday, although there was no immediate confirmation of that or information on what had been said.

He said that the Movie Gallery bonds plunged to 17 bid before coming back from that nadir to finish at 22 bid, 24 offered. Apart from Movie Gallery, he said, "not much traded."

Movie Gallery's Nasdaq-traded shares swooned to 66 cents, down $1.23 (a 65.08% drop) on volume of 26 million shares - more than 30 times the usual turnover.

Movie Gallery said on Monday that it had generated "significantly softer than expected results" in the second quarter, and thus was not able to meet financial covenants contained in its senior credit facility for the fiscal quarter ended July 1.

Movie Gallery said it was in talks with its lenders, led by Goldman Sachs Credit Partners LP, the administrative agent for the credit facility, and said that it would develop a plan to remedy the defaults. Such remedies could include seeking a waiver or amendment of the covenant provisions, asking lenders and bondholders for forbearance or a similar agreement.

Movie Gallery also said that it is considering "asset divestitures, recapitalizations, alliances with strategic partners, and a sale to or merger with a third party."

Blockbuster follows Movie Gallery lower

Dothan, Ala.-based Movie Gallery - despite being the second-biggest video rental chain operator in the United States, behind only Blockbuster - continues to struggle mightily. Industry observers said that unlike its larger rival Movie Gallery put all of its efforts into its traditional brick-and-mortar "Movie Gallery" and "Hollywood Video" stores, ignoring the growing inroads that Netflix Inc. was making into the movie-rental business. Blockbuster, meantime, decided about a year or two ago that "if you can't beat 'em, join 'em," and opened its own on-line movie rental service. However, even though the Dallas-based movie-rental giant is in the continual process of closing hundreds of less-profitable stores and shifting more of its focus to its new on-line operations, its results are still affected by the same industry dynamics bedeviling Movie Gallery.

With the latter's bonds practically in free-fall, Blockbuster's bonds have also been pushed downward, though nowhere nearly as dramatically as the Movie Gallery plunge has been. A market source saw its 9% notes due 2012 fall as low as just under 90 from prior levels around 94, although the bonds bounced off the lows and came back late in the day to 92.5, down 1½ points.

A trader earlier had estimated the bonds were off 3 points on the day at 89 bid, 91 offered.

No sale sizzle to Wendy's bonds

In the merger and acquisitions arena, Wendy's International's bonds were seen having moved lower, rather than higher, in response to the news that billionaire investor Nelson Peltz - whose Triarc Cos. is the parent company of the 1,000 outlet-plus Arby's fast-food restaurant chain - had expressed an interest in buying the company.

Through his Trian fund, Peltz and his allies already own some 9.8% of Wendy's, having recently upped that from 8.4%

Wendy's 7% notes due 2025 were seen having slid to about the 87.5 level from 92 on Monday, while its 6.20% notes due 2011 lost about 1½ points to end at 91.25.

Peltz has been pressuring the Dublin, Ohio-based Wendy's - one of the largest hamburger chains in the country, with over 6,000 company owned or franchised stores coast-to-coast, exceeded only by McDonald's and Burger King - to improve value for shareholders such as himself.

He has complained that despite his large-shareholder status, Wendy's management has blocked his efforts to boost the company's value. Wendy's wants Peltz to agree to a restrictive one-year standstill clause that would require Peltz to refrain from purchasing additional stock in Wendy's during that time period.

He said in a letter to Wendy's management that while Trian "will support the transaction that is best for all Wendy's shareholders, we believe that Triarc is a natural, strategic buyer for the company and should be encouraged to participate in the process." Wendy's empanelled a special board committee in April to explore the possible sale of the company

Trump bonds a little better

Trump Entertainment Resorts Inc.'s 8½% notes due 2015 - which on Monday had slid to around the 95 level from prior levels above 99 when the Atlantic City, N.J. -based casino operator said it had not found a buyer willing to make what it considered to be a suitable offer to buy the company - were seen a little bit better.

A source pegged the bonds going home slightly above 96 bid, up perhaps ¼ to ½ point from the levels at which they had finished on Monday following the disappointing announcement.

Trump - which underwent a Chapter restructuring about two years ago - had been trying since mid-March to find a buyer, and its bonds had firmed to around the 103 level last month on news reports identifying several potential suitors. But the company said Monday that those "expressions of interest" fell short of what it was looking for to sell its three properties in the seaside New Jersey gaming center, the Trump Taj Mahal, The Trump Plaza and the Trump Marina.

A market participant said Tuesday that the bonds had risen a little on speculation that rather than selling the whole company, Trump might part with one or two of its properties and presumably use the cash to make needed improvements to its remaining holdings.

Hilton news too late for trade

In another M&A-related development out of that same lodging and gaming sector, Hilton Hotels Corp. announced well after trading had wrapped up for the day that it has agreed to be acquired by The Blackstone Group LP, for $18.5 billion. Including debt assumption, the deal for the lodging giant is valued at $26 billion.

The news came way too late to affect trading in Hilton's bonds. However, its 7½% notes due 2017 were seen having moved lower in relatively thin trading even before the news hit the market, sliding as low as 99.75 bid before closing out at 100.25 - well down from its late Monday levels around 104.

Chesapeake up after oil property deal

Elsewhere, Chesapeake Energy Corp.'s bonds were seen better after Monday's announcement by the Oklahoma City-based independent oil and gas exploration and production company that it will acquire about 8,500 net undeveloped leasehold acres in Tarrant County, Tex., near Fort Worth.

Its 7½% notes due 2013 were seen up 1 1/8 point at 102.375 in relatively active trading.

Financial terms of the deal were not disclosed. Chesapeake is buying the acreage from Four Sevens Resources Co., Sinclair Oil & Gas Co. and their affiliates and partners.

The company also said it had entered into a land services agreement under which Four Sevens and Sinclair have agreed to work on an exclusive basis in certain other areas of the county to acquire leases for Chesapeake.

Including the acreage in the deal announced Monday, Chesapeake said that its Fort Worth Barnett Shale leasehold position now totals about 220,000 net acres.

Out of that same energy patch, one of the few other bonds seen moving around on decent size was Plains Explorations & Production Co.'s 7% notes due 2017, quoted down 1½ points around the 95 level, although no fresh news was seen out on the Houston-based independent exploration and production operator.

Overall, apart from the big plunge on high volume in Movie Gallery, "the market did a little better," a trader said. He saw the widely followed CDX index of junk bond performance 1/8 point better at 97 3/8-971/2. But outside of the Movie bonds, "not much traded."

A syndicate source told Prospect News that the high yield market had been generally strong, with the index "up a little," at the end of Tuesday's abbreviated pre-holiday session.

However, the official added, Tuesday was extremely quiet, and many if not most of the players were gone by noon.

ServiceMaster pulls $1.15 billion

The run-up to the Fourth of July produced a significant amount of chop in the primary market.

For example, 43% of June's new issues priced at the high end of price talk while only 16% priced at the low end of price talk or lower.

More to the point, perhaps, four prospective issuers postponed six tranches totaling $2.3 billion.

The most recent was ServiceMaster Co., which postponed its $1.15 billion offering of eight-year senior notes (B3/CCC+) on Tuesday, citing market conditions.

This postponement came on the heels of what had been characterized as a bumpy road for the LBO deal from the Downers Grove, Ill., provider of home maintenance services.

It had been restructured into two tranches from the single tranche which the company initially launched.

Price talk was set on June 29. A $575 million tranche of cash-pay notes was talked at the 10½% area and a $575 million tranche of PIK toggle notes was talked at the 11% area, with a 100 basis point PIK coupon step-up.

JP Morgan, Citigroup, Goldman Sachs & Co., Morgan Stanley and Banc of America Securities LLC were joint bookrunners.

June's vanished deals

ServiceMaster was the fourth issuer to pull a deal in the run-up to the Fourth of July holiday.

On June 26 U.S. Foodservice Inc. postponed its restructured $650 million offering of eight-year senior notes (Caa2/CCC), also due to market conditions.

Earlier that deal had been downsized from $1.55 billion and restructured, with the Columbia, Md., foodservice distributor abandoning tranches of toggle notes and PIK for life notes.

The same day Catalyst Paper Corp. postponed its $200 million offering of 10-year senior notes (B2/B) citing adverse market conditions.

Before abandoning the deal the Vancouver, B.C. mechanical printing papers company downsized it to $150 million, and the tenor of the bonds was reduced to eight years from 10-years.

The following day, June 27, Magnum Coal Co. postponed its $350 million offering of seven-year senior secured second-lien notes (B3/B-), citing market conditions.

They were big deals

On Tuesday one high yield syndicate official contended that the postponed deal count should only include the final sizes and structures that the issuers and their underwriters had in the market when the deal was pulled.

If, however, the tally includes the sizes of the deals that each respective issuer launched the amount of proceeds postponed increased to $3.25 billion from $2.30 billion.

The syndicate official commented that, especially with regard to Foodservice and ServiceMaster, the deals pulled in late June and early July were big deals.

"The market doesn't feel that great right now," the source added.

"There is the sense that people are going to take the holiday and come back and see where things stand."

Historical perspective

Nevertheless, examining the Prospect News database turns up a one-month period that was indeed a rockier one in the new issue market than the June to early July 2007 period.

Between April 20, 2004 and May 20, 2004 the junk market saw prospective issuers postponing 13 dollar-denominated Rule 144A tranches totaling $4.6 billion of proceeds.

During that period, however, none of the pulled deals topped the $1 billion mark.

Post-Independence Day

A number of sources who spoke to Prospect News on Monday and Tuesday forecast that the last two days of the Fourth of July week - although the market will be open - will almost certainly be on the quiet side as players stretch the mid-week holiday into a five-day break running through the weekend.

Terms are expected on a deal from Switzerland's Barry Callebaut Services NV.

The company was set to complete a roadshow on Tuesday for its €350 million offering of 10-year senior notes (Ba1/BB+).

Goldman Sachs & Co., ABN Amro and BNP Paribas are joint bookrunners for the Regulation S offering.

No price talk was heard.

In addition, High Arctic Energy Services Trust is expected to set terms on its $130 million offering of five-year fixed-rate bonds.

The Red Deer, Alta., provider of specialized oilfield equipment and services talked the notes at 10¼% to 10 ½%.

Two Norwegian banks, SEB Merchant Banking and Swedbank, are running the books.

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