This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Battle for Bally's Heats Up

This column was originally published on RealMoney on Sept. 13 at 10:40 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The activist battle against Bally's Fitness (BFT) is going to another level as Pardus Capital Management appears to be joining Liberation's effort.

I first wrote about Liberation and Bally's on July 25 when the stock was at $3.25. Piggybacking on top of Liberation's efforts has proved successful, with the stock closing Monday at $4.06, a full 25% higher. Pardus revealed that it owned 12% of the company (4 million shares) in a Securities and Exchange Commission filing last week, with a block of 1 million shares being bought last week at $3.93 per share.

In Pardus's (PCM's) filing it stated:

"PCM has communicated with management of the Company, and expects to continue to communicate with management of the Company." Pardus also threw in the line that funds do when they want to start talking with the other activists: "Depending upon such factors that PCM may from time to time deem relevant, PCM may, among other things, (i) communicate with other shareholders of the Company..."

Pardus's confidence, and Liberation's bet, achieved a substantial boon in the past two weeks as Bally's reworked some of its debt agreements with its bondholders. Let me just state that when a company defaults on its bonds, that is often the best time to buy its stock. Why? Because the hedge funds that own the bonds will do anything they can to avoid reporting a writedown on that debt to their investors.

In Bally's case, the "writedown avoidance efforts" began on Aug. 5, when two bondholders sent notice that Bally's was in default of their bonds because of earnings restatements that Bally's was in the process of filing. Bondholders typically have covenants in their loan agreements which trigger a default if the company does not file financial statements on time. Bally's has been under an SEC investigation for its earnings and is restating from 2000 to 2004. Bally's was given 30 days to either get a waiver extending its deadline or to file the restatements. Once the company defaults, even if it's a default based on a financial reporting covenant, bankruptcy is often a short hop away.

On Aug. 31, Bally's announced that the bondholders who had previously notified them they were in default had sent the company a waiver extending the deadline of the Financial Reporting Covenant (the line item in the loan agreement that said the company was in default unless it filed financial statements on a regular basis) until Nov. 30, 2005.

For taking on this additional risk, the bondholders got paid handsomely. One group of bondholders received $15 cash for every $1,000 invested (effectively raising their already high interest rate of 9.875% by another 1.50% on the year) and the other group of bondholders got the choice between $20 or 9.2 shares of stock for every $1,000 invested. They also changed slightly the terms of the loan agreement, making it more difficult for Bally's to default.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs