Bondholders Give Blockbuster Breathing Room

Bondholders have given Blockbuster some breathing room, postponing a $42.1 million payment deadline as the struggling chain continues efforts to restructure its balance sheet.

Blockbuster struck a forbearance agreement with its bondholders postponing the required interest payment to Aug. 13 from July 1, the chain said in an SEC filing. The money was due on $675 million in 11.75 percent senior secured notes that mature in 2014. The $42 million consisted of a $23.9 million amortization payment and $18.5 million in interest. The notes were issued in October 2009.

The new pact also requires that Blockbuster continue to employ a chief restructuring officer, provide 13-week treasury cash flow forecasts and have weekly communications with the bondholders’ attorneys and financial advisers, Blockbuster said. Short of reaching an agreement, Blockbuster would have defaulted July 31 on the loan for failing to make the July 1 payment, the company said. Blockbuster has $938 million in debt and had targeted refinancing it in time for the company’s June 24 annual meeting (CED June 25 p4).

The accord with bondholders came after Blockbuster said it expects to be delisted from the New York Stock Exchange after a reverse stock split failed to get a majority of shareholder votes in favor at the annual meeting. Blockbuster delayed the start of the annual meeting 30 minutes after falling short of the requirement that holders of 50 percent of its common stock be present or represented by Proxy. Initial totals were 48.7 percent present, Blockbuster said. Blockbuster had sought shareholder approval for merging Blockbuster’s two classes of shares into one and a 25:1 reverse stock split. The split was designed to keep Blockbuster in compliance with NYSE listing standards since its shares have traded below $1. Its shares closed 5 cents lower Friday at 18 cents.

Blockbuster’s board also extended CEO Jim Keyes’ employment contract. The pact was to expire on July 1. Keyes was hired three years ago to help turn Blockbuster around. Since then Blockbuster has struggled amid sharp competition from Netflix and Redbox as well as the emergence of Internet video download services. Blockbuster was expected to benefit from Movie Gallery’s departure and a 28-day window for getting Fox, Universal and Warner movies ahead of Netflix and Redbox. Movie Gallery, which also operated Hollywood Video stores, closed the last of its 1,100 stores in June.

Consumers appear unaware of a DVD’s street date and are likely to discover its availability at a local Redbox kiosk, “rendering the 28-day head start inconsequential over the long term,” said Michael Pachter, an analyst at Wedbush. “Market share losses appear to be accelerating at a faster rate than Blockbuster can diversify its revenue sources,” he said. Any benefit Blockbuster gets from the 28-day window or Movie Gallery’s closing are “likely to be only temporary,” Pachter said. Pachter suspended his price target for Blockbuster’s stock citing the chain’s “uncertainty about recapitalization.” Pachter had forecast fiscal 2010 earnings of 82 cents on $3.41 billion in revenue.