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Standard & Poor’s Lowers Boom on Blockbuster

13 Apr, 2009 By: Erik Gruenwedel


With its credit worthiness already relegated to junk status, Blockbuster Inc. April 13 received another blow when Standard & Poor's Ratings Services placed the Dallas-based DVD rental giant on default notice.

The service removed Blockbuster from its list of troubled companies and into a more dire status by cutting the credit rating two notches from “B-“ to “CCC,” which indicates there is risk of default or bankruptcy within the next 12 months.

The reduction comes despite the fact Blockbuster last week said it had amended its credit revolver, including securing $250 million in a refinanced loan due Sept. 30, 2010. The loan requires prepayments of $311 million over the next 18 months.

“While we recognize that getting the amendment is a positive that extends the revolver rather than not having a revolver to begin with, we feel that there is significant near-term risk,” said S&P analyst David Kuntz.

Indeed, Blockbuster warned in its annual 10-K report that funding of the amended revolver was not assured, and failure to secure funding could jeopardize the business as a going concern.

Kunz said that despite Blockbuster’s ability to generate considerable liquidity (it generated nearly $1.4 billion in revenue in the most recent quarter), he felt the negative amortization of the revolver could pressure liquidity in the near-term.

“The company’s capital structure is likely find liquidity at or near minimum cash levels required to operate the business during certain periods during 2009,” Kunz said. “That’s not good.”

Separately, Fitch Ratings last week said it considered Blockbuster’s outlook stable despite also giving it a “CCC” rating. Fitch said its opinion was based in part on Blockbuster’s “market leading” 37% market share in the video rental business.

It also lauded CEO Jim Keyes’ efforts to transition Blockbuster from rental pure play to also include sellthrough and digital initiatives.

“I think it goes to show you that there are a lot of differences of opinions out there on Blockbuster,” said Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles.

He said he believes Blockbuster to be stable despite the fluctuating stock price and general uncertainty surrounding the company.

“One of them is wrong,” quipped co-analyst Michael Pachter.

Blockbuster shares closed up 3 cents to 80 cents per share.

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