Should Blockbuster File For Bankruptcy?
NEW YORK (
) -
Blockbuster
(BBI) - Get Report
is in some mess, but is its only answer to file for bankruptcy?
The company finally admitted on Tuesday in a Securities and Exchange Commission filing that it may be forced to file Chapter 11 if cash flows don't improve and it is unable to restructure its debt. Blockbuster reportedly has about $1 billion in debt.
"These factors raise substantial doubt about our ability to continue as a going concern," Blockbuster said in the filing.
The news prompted Fitch ratings to cut Blockbuster's rating to C from CCC and downgraded its $675 million in senior secured notes to CC/RR3 from B/RR2.
Fitch also affirmed $300 million in senior subordinated notes at C/RR6, which it said reflects poor recovery prospects in a distressed case.
The ratings agency said Blockbuster needs to restructure a large portion of its debt and expects its credit situation to continue to weaken in 2010.
In an effort to shore up cash Blockbuster has been closing underperforming stores, and earlier this week said it is looking into
. It has also said that it plans to reduce costs by $200 million this year. Still, will this be enough?
By filing Chapter 11 Blockbuster would be able to ease this debt pressure.
Investors took Blockbuster's warning seriously, with shares plunging 30% to close at 28 cents on Wednesday. While the move could ultimately be beneficial for the company, investors fear a bankruptcy filing would leave common shares practically worthless.
Shares are continuing on their downward spiral on Thursday, falling 8.2% to 26 cents in early trading.
Blockbuster has provided little confidence that it will be able to recover on its own. Last month, the video rental company reported a fourth-quarter loss of $434.9 million, or $2.24 a share, as same-store sales fell almost 16%.
While debt has been Blockbuster's major burden, it has also faced increasing competition from rivals like
Netflix
(NFLX) - Get Report
and
Coinstar's
(CSTR) - Get Report
Redbox. A bankruptcy filing wouldn't eliminate this fierce competition.
Granted, Blockbuster is rolling out kiosks and has other initiatives in place to beef up its convenience for consumers, but these moves could also be too little too late.
What do you think? Should the company file for bankruptcy to ease its debt load or continue fighting, protecting shareholders' investments?
--Reported by Jeanine Poggi in New York.
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