Poor second quarter results caused Movie Gallery's loan-only credit default swaps to widen 150-200 basis points to 700 last week. The spread widening follows the sharp drop in trading of the company's loans and bonds. Movie Gallery's term loan "B" has fallen three points to 94 1/2 since the company announced results Aug. 10. Its bonds have dropped 20 points to 62 3/4.
A trader noted Movie Gallery is one the few distressed credits on which LCDS trade, because most distressed loans belong to companies that have already filed for bankruptcy. Hedge funds and distressed debt funds are the main buyers and sellers of protection, said the trader.
Movie Gallery reported a $14.9 million net loss in the second quarter, compared with a $12.2 million net loss in the same period last year. Adjusted EBITDA was $57.6 million, compared with $60.2 million in the same quarter of 2005. In a release, the company said it continues to be affected by a weak home-video release schedule. It has hired Merrill Lynch to advise it on ways to improve its capital structure as well as Alvarez & Marsal, a turnaround, restructuring and corporate advisory firm. As of July 2, Movie Gallery was in compliance with the financial covenants in its credit facility, it said in a release. A Movie Gallery spokesman declined to comment on trading activity.