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16 May 2005
MOODY'S DOWNGRADES BLOCKBUSTER'S LONG TERM DEBT RATINGS (SENIOR IMPLIED TO B1) AND SPECULATIVE GRADE LIQUIDITY RATING TO SGL-3; OUTLOOK STABLE
Approximately $1.45 Billion of Debt Securities Affected.
New York, May 16, 2005 -- Moody's Investors Service downgraded the long term debt ratings
of Blockbuster Inc. (senior implied to B1) and the Speculative
Grade Liquidity Rating to SGL-3 (adequate liquidity). The
outlook is stable. The downgrade is prompted by: (1) Moody's
expectation that Blockbuster's operating income and free cash flow
generation will be lower than we had originally anticipated; (2)
the uncertainty over the strategic direction for the company following
a shareholder vote which resulted in a dissident group of nominees obtaining
three board seats and which could negatively impact operating performance:
and (3) the increased likelihood that the new nominated directors will
push for an increase in dividends.
Moody's noted that Blockbuster's first quarter operating results
reflected the company's continued spending on new initiatives and
that over the next twelve months operating performance is likely to continue
to be constrained by this spending. In addition, Moody's
expects that Blockbuster's financial performance will be below our
original expectations and that it will likely result in free cash flow
to debt for fiscal year 2005 well below 8%, (metrics that
we specified in March 2005 as a potential downgrade trigger). The
recent first quarter financial performance also resulted in the company
receiving an amendment from its bank group to provide some near term covenant
Additionally, the May 11th shareholder vote resulted in Carl Icahn,
Edward Beier, and Strauss Zelnick, being elected to the board
of directors to replace incumbent directors Linda Griego, Peter
Bassi, and Chairman John Antioco. While the board of directors
unanimously agreed to reappoint CEO John Antioco as Chairman, there
are likely to be differing views within the board on the appropriate operating
and financial strategy for the company. While the new board members
may well seek to preserve Blockbuster's cash flow generation by
cutting expenses, Moody's believes that there is a risk that
differing views within the board and/or between the board and management
could have a negative impact on operating performance. Moreover,
any cost reductions flowing from the new board composition are likely
to take time to contribute positively to earnings and cash flow.
The new rating level is supported by Blockbuster's clear leadership
and global presence in the area of video and game rentals, the continued
fragmented nature of the rental industry with only one other sizable player
(Movie Gallery post Hollywood Entertainment acquisition), and the
high brand value. In addition, the ratings reflect the discretionary
nature of much of the company's additional spending over the next
twelve to eighteen months which provides some flexibility. The
ratings are constrained by the risk of differing opinions within the board
and between the board and senior management, the uncertainty over
the company's strategic direction, and the company's
weakened debt protection measures.
The stable outlook reflects Moody's expectation that Blockbuster
will be able to maintain credit metrics appropriate for the rating category
and adequate liquidity over the next twelve to eighteen months.
Given the recent downgrade, an upgrade is highly unlikely.
An upgrade would require evidence of stability at the board level,
a creditor-friendly financial policy, and a coherent operating
strategy that has some track record of success, as well as adjusted
debt/EBITDAR closer to 5.0x and free cash flow to debt above 12%.
Ratings could move downward should liquidity deteriorate or should adjusted
debt to EBITDAR rise above 6.5x.
The downgrade to an SGL-3(adequate liquidity) from an SGL-2(good
liquidity) reflects Moody's expectation that operating performance
will cause a reduction in liquidity going forward, as well as the
reduction in the level of the cushion in the bank covenants over the next
twelve months. Internally generated cash flow and cash on hand
will be sufficient to fund its working capital, capital expenditures,
term loan amortization, and a modest dividend over the next twelve
months. Any large increase to dividends will likely result in increased
borrowings. Blockbuster has a $500 million revolving credit
agreement of which $275 million was available after deducting the
Viacom letters of credit and outstanding borrowings.
The following ratings are downgraded:
Senior implied to B1 from Ba3;
Issuer rating to B2 from B1;
Senior Secured Bank Credit Facilities to B1 from Ba3;
Senior Subordinated Notes to B3 from B2;
Speculative Grade Liquidity Rating to SGL-3 from SGL-2.
Blockbuster Inc., headquartered in Dallas, Texas,
is a leading global provider of in-home movie and game entertainment
with approximately 9,100 stores throughout the Americas, Europe,
Asia, and Australia. Total revenues for fiscal year 2004
were $6.1 billion.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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