Movie Gallery is reportedly seeking covenant relief on its $700 million term "B" loan. An investor said the company will increase the coupon on its term "B" loan by 25 basis points and file monthly financial reports for the amendments to its credit. He also said the company was seeking to tack on $50 million to the "B" loan and already had some commitments. Around $20-30 million of bank debt traded on news of the covenant relief, with the price dropping two points before rebounding to par. Fifty-one percent of the lender group has to vote in favor of the amendment. A trader said it may take a couple of weeks for lenders to vote on the deal.
The news also affected the bank debt of Blockbuster, a competitor of Movie Gallery. Blockbuster's debt traded down 1/2 point to 97. One trader said the repricing on Movie Gallery's debt is high to attract hedge funds to invest in the company. The investor said Movie Gallery's call with investors was tame compared with the three-hour investor call with Blockbuster, which also requested credit amendments in August. Movie Gallery officials declined to comment on its amendments.
Movie Gallery had a net loss of $12.2 million in the second quarter of 2005, compared with a $10.6 million profit in the same period last year. Joe Malugen, president and ceo of Movie Gallery, blamed the drop in its revenues on the box-office slump. Movie attendance in the U.S fell 17% in the second quarter. "Releases are terrible. People are not willing to pay to see the bad movies," said Diane Shand, an analyst at Standard & Poor's. Standard & Poor's downgraded the ratings on Movie Gallery to B from B+. The rating agency said the downgrade reflects the pressure the firm's operating results are under because of the poor performance of movies at the box office. Moody's Investors Service downgraded $870 million of senior secured credit facilities to B2 from B1, and $325 million of guaranteed senior notes to B3 from B2.
Rob Magnuson, research analyst at Merrill Lynch, said he had expected the company to trip its leverage covenants. In a research report, Merrill Lynch said it estimates the company's leverage would be 3.1 times at fiscal year 2006, which is well outside of the 2.5 times net leverage limit in its loan agreement.
