Movie Gallery faces risk of bankruptcy-analysts

By Gina Keating

LOS ANGELES, Jan 24 (Reuters) - Shares of Movie Gallery Inc. MOVI.O shares have swung wildly in recent months as investors ponder whether the debt-laden No. 2 U.S. movie rental chain will be forced by its creditors to declare bankruptcy.

After a yearlong respite from some provisions of its debt agreement, Movie Gallery said this week that it likely will not be in compliance in the current quarter unless it renegotiates those agreements for a third time.

Three analysts said the company faced a rising risk of bankruptcy unless its creditors agree to a new waiver and the company moves more aggressively to cut store expenses.

But the analysts differed over whether creditors would take another chance on Movie Gallery after a year of declining rental revenues and increased competition from Blockbuster Inc. (BBI.N) and Netflix Inc (NFLX.O).

"I don't see what the benefit would be to the lenders to force the company into bankruptcy," Margaret Taylor, a senior analyst at Moody's Investors Service, said on Tuesday.

"I think it is likely they will come to some sort of resolution," Taylor said. "The best thing for the company to do is to continue operating in hopes of improving its bottom line."

Wedbush Morgan Securities analyst Michael Pachter forecast a break-even year for Movie Gallery in 2007, but said the company's creditors "aren't going to get repaid their principal unless you cut (operating expenses) with a chain saw."

The company said on Monday that it expects to announce plans this quarter to improve its capital structure for the long term, including possibly issuing debt or equity and selling assets.

"I think for Movie Gallery, the most important thing is that they make enough money to pay their interest," JPMorgan Securities analyst Barton Crockett said on Tuesday. "If they are able to do that I think their bankers are likely to let them keep operating outside of bankruptcy."

With the bulk of its $1.1 billion in long-term debt due between 2010 and 2012, Movie Gallery also must "show enough progress on earnings and ... some reduction in debt that they can persuade lenders to refinance and extend the maturities," Crockett said.

Movie Gallery last year hired an investment bank and turnaround specialists to help it restructure but it turned in a delayed and deeper-than-expected third-quarter loss on Monday, mainly on costs related to store closures.

Its shares have dropped about 90 percent since June 2005, when it was hit with a slump in rental revenue and competition from Blockbuster and Netflix shortly after taking on debt to buy the Hollywood Video chain.

Last March, it won relief from some financial covenants under its credit agreement for four quarters, but will be required to pay a higher interest rate starting this quarter.

Shares of Movie Gallery were up 2.6 percent, or 9 cents, at $3.50 on Nasdaq in Wednesday afternoon trading.