January 22, 2010 / 8:00 PM / 9 years ago

US CREDIT-Blockbuster debt value drops as movie trends weigh

 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
 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
 "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
 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
  (Editing by Padraic Cassidy)

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