Movie Gallery's bank debt has clawed its way back to par in the wake of Goldman Sachs' commitment to fully underwrite a new credit that will refinance $836.4 million of existing bank loans for the beleaguered Dothan, Ala.-based video rental chain.
Investors have now seen the May 2005 vintage paper rise from the low 90s in November to around 97 Jan. 18 and finally back to par last week. Some, however, remain skeptical about the sector. "It's just a bad business--that and Blockbuster," said one portfolio manager. "But, like everything else, it will get done." Debt for main competitor Blockbuster is also trading around par.
The new financing is expected take out the existing credit facility in its entirety and provide for working capital and other corporate purposes. It is expected to have a five-year maturity. Tranche sizes could not be determined. A Goldman banker declined comment.
The original facility with Wachovia Securities and Merrill Lynch backed the acquisition of Hollywood Entertainment Corp., the parent of the Hollywood Video chain (LMW, 5/6/2005). Movie Gallery also issued $325 million of outstanding 11% senior notes due 2012 to back the acquisition. It is not clear why Wachovia and Merrill are not leading the new deal.
"It will clearly help the potential covenant violation at the end of the quarter," said Margaret Taylor, analyst at Moody's Investors Service, about the new credit. In March 2006, the company amended its credit agreement, relaxing financial covenants and increasing restrictive operating covenants and interest rate margins providing four quarters of relief (CIN, 3/10). Investors received a 50 basis point increase on the term loan in connection to the amendment, which is payment-in-kind. The amendment only lasted through 2006 and once the first quarter of 2007 ends the company will fail the more restrictive covenant tests, according to a Securities and Exchange Commission filing. Calls to Thomas Johnson, interim cfo and senior v.p., were referred to a spokesman who declined comment.
The existing credit consists of a five-year, $75 million revolver; a five-year, $71.5 million term loan "A" and a six-year, $689.9 million "B" term loan after being reworked throughout syndication. The pro rata was originally priced at LIBOR plus 2 3/4% and the "B" tranche at LIBOR plus 3%. Investors earned an extra 75 basis points on the "B" tranche and 50 on the pro rata when tough market conditions in the video rental market caused trading to hover below par (9/23/2005).
