By Karen Brettell
NEW YORK, Jan 22 (Reuters) - Blockbuster Inc's BBI.N unsecured debt, after halving in value this week, is likely to continue to trade at distressed levels unless the company can turn around the loss of its business to new competitors and technologies.
The movie rental chain said late on Wednesday that its fourth quarter and fiscal 2009 earnings would be sharply lower than expected because of weak holiday and international sales.
Blockbuster's 9 percent unsecured bond due in September 2012 halved in price to 32 cents on the dollar on Friday, from 64.5 cents before its earnings announcement, according to MarketAxess.
"They surprised everybody by dramatically lowering guidance, which they had recently affirmed at the end of their last conference call in mid-November," said Kim Noland, analyst at Gimme Credit.
"The market is obviously concerned that if things continue to deteriorate they could have some sort of issue," she said.
Blockbuster said it now anticipates adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $195 million to $205 million for the year ended Jan. 3, down from its earlier forecast of $270 million to $290 million. For details, see [ID:nN20162843]
The company said that performance during the holiday period was well below expectations, in particular during the key month of December, which can account for as much as 30 percent of its full year EBITDA.
Blockbuster improved its liquidity last year by refinancing its bank debt with a new bond sale.
The company in October sold $675 million in senior secured notes, up from an originally planned $340 million.
The dramatic fall in the unsecured bonds this week, which would be repaid after the secured debt should the company fail, likely reflects market participants reevaluating the asset coverage, said Noland.
Moody's Investors Service said on Friday that it views the company's liquidity as adequate for the next year.
"However, the earnings revision does highlight several of our longer term credit concerns," the rating agency said. "These include ongoing price deflation across the industry, a secular shift in how consumers rent movies, heavy discounting by Wal-Mart Stores Inc, and the impact of evolving technology."
Moody's rates Blockbuster Caa1, seven steps below investment grade.
The drop in EBITDA, meanwhile, worsens Blockbuster's credit metrics, including its leverage, which is a measure of debt relative to earnings.
Standard & Poor's on Thursday changed its outlook on the company to negative from stable, indicating a rating downgrade over the coming two years may be more likely, but affirmed the company's rating at B-minus, six steps below investment grade.
The revision reflects S&P's "belief that performance will remain challenged over the near term, and our expectation for credit metrics to deteriorate significantly," the agency said.
Credit default swaps on Blockbuster's debt are trading at an upfront level of around 40 percent, or $4 million to insure $10 million for five years, plus annual payments of $500,000, indicating high concerns over its debt, according to Markit Intraday. (Editing by Padraic Cassidy)