Tembec bonds jump on U.S.-Canada lumber deal; Movie Gallery bank debt rise fizzles out

By Paul Deckelman and Sara Rosenberg

New York, April 28- Tembec Industries Inc.'s bonds moved sharply higher Friday as the United States and Canada announced a long-anticipated trade deal that brings to an end a decades-long feud between the two neighbors over Canadian lumber exports to the States. Tembec and its sector peers stand to get back hundreds of millions of dollars in tariffs they have paid out over the past four years.

Elsewhere, Movie Gallery Inc.'s term loan B finally took a breather on Friday, with levels coming in by about ¼ to ½ point after having spent most of the week on the rise, bank debt traders said.

The Dothan, Ala.-based home video rental company's bank debt was seen closing out the session at 92 bid, 93.25 offered, down from Thursday's closing levels of 92.5 bid, 93.5 offered, a trader said.

Over the course of this past week, Movie Gallery's bank debt spent every day other than Friday heading upwards, helped by a variety of factors, such as positive earnings news coming from Movie Gallery rivals such as Netflix Inc. and Blockbuster Inc. Although good news for the company's competitors seems like an odd thing for Movie Gallery's investors to latch onto, market observers said they took those results as a sign that despite some recent weakness, there is some life yet left in the video-rental industry - a potentially encouraging development for Movie Gallery as well.

Also pushing the bank debt up was news of the company's decision to restructure leases at more than 1,100 of its roughly 4,000 existing Movie Gallery and Hollywood Video stores.

And yet another factor perhaps boosting the debt was a filing with the Securities and Exchange Commission in which a large shareholder, Schultz Asset Management LLC, suggested that the company do an equity rights offering - and then use the proceeds to pay off debt.

Those factors also helped the company's 11% notes due 2012 firm earlier in the week, bringing them to current levels around 52 bid, 54 offered. However, the bonds were seen little changed over the latter part of the week at 52 bid, 54 offered.

Montreal-based Tembec has been the biggest beneficiary among the recently robust junk-rated forest names because it stands to get one of the biggest refunds under the terms of the plan announced Thursday, after having paid C$317 million in tariff penalties since 2002.

A trader saw its 8 5/8% notes due 2009 move up to 59 bid in Thursday's session, then open at 61 bid, 62 offered Friday, move as high as 66 bid intraday, before going home at 63.5 bid, 64.5 offered, "up four or five points on the day."

A trader at another desk saw those bonds pop up to 64 bid, 66 offered from Thursday's closing levels at 56 bid, 58 offered, before coming off the highs to end up six points at 62 bid, 64 offered. He also saw Tembec's 8½% notes due 2011 move up to 61 bid, 63 offered from Thursday levels at 54 bid, 58 offered, before closing Friday at 59 bid, 61 offered. And its 7¾% notes due 2012 likewise moved to a peak level Friday of 59 bid, 61 offered from 53 bids, 55 offered previously, before going home at 58 bid, 60 offered, still up five points on the day.

Under the terms of the deal announced late Thursday, Canada will not cap its softwood exports at present levels - it has about one-third of the U.S. softwood market - but it will impose a tax on its own lumber exports south should prices fall $10 below the current average price of $370 per 1,000 board feet. In return, Washington - which since 2002 has been collecting tariff penalties of up to 27% from Canadian producers it said were unfairly competing with domestic firms - will hand back 80% of the $5 billion it has collected.

Market buzz that a deal was near had pushed the bonds of Tembec and its sector peers up solidly over the previous several sessions and a trader mused that "usually you buy on the rumor and sell on the news - but it didn't happen this time" - or, at least, the second part did not.

Refco up further

Elsewhere, Refco Inc.'s bonds continued a solid two-day rise, even as the New York-based futures trading company's restructuring under Chapter 11 continued.

A trader saw its 9% notes due 2012 as having jumped to 75 bid, 78 offered on Thursday from prior levels in the upper 60s. On Friday, he said, the bonds tacked on another two points to end at 77 bid, 79 offered.

Dura down again

In the automotive realm, Dura Automotive Systems Inc.'s bonds continued the retreat begun Thursday, when the Rochester Hills, Mich.-based automotive components manufacturer reported a wider fiscal first-quarter loss versus a year ago.

Dura - whose bonds were seen having moved down on Thursday following what the company's chief financial officer termed "a very disappointing quarter" - continued to move in reverse on Friday. Its 9% notes due 2009, which lost more than two points Thursday, fell another point Friday, a trader said, quoting the bonds at 54.5 bid, 55.5 offered. However, he saw its 8 5/8% notes due 2012, which had lost nearly a point Thursday, as holding essentially unchanged Friday at 85.75 bid, 86.75 offered.

Dura's bonds slid after the company reported a net loss for the quarter of $7 million (38 cents per share), versus year-earlier red ink of $4.8 million (26 cents per share), as sales dropped sharply amid continued problems in the domestic automobile industry, a major portion of Dura's customer base.

American Axle weak

Another automotive name limping along in the breakdown lane on Friday after "a little disappointing numbers," a trader said was American Axle and Manufacturing Holdings Inc., whose 5¼% notes due 2014 were half a point lower at 82.5 bid, 83.5 offered. Its NYSE-traded shares lost $2.43 (12.13%) to end at $17.61 on volume of 3.7 million - nearly four times the norm.

The Detroit-based maker of driveline systems and related powertrain components and chassis modules said that its first-quarter profit fell 35% versus a year ago. It blamed the fall on a drop in gross margin and operating income as a result of higher expenses.

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