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Rating Action:

MOODY'S PLACES BLOCKBUSTER'S LONG TERM DEBT RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE (SENIOR IMPLIED Ba2)

09 Feb 2005
MOODY'S PLACES BLOCKBUSTER'S LONG TERM DEBT RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE (SENIOR IMPLIED Ba2)

Approximately $1.45 Billion of Rated Debt Securities Affected

New York, February 09, 2005 -- Moody's Investors Service placed the long term debt ratings of Blockbuster Inc. on review for possible downgrade and downgraded the speculative grade liquidity rating to SGL-2 following the commencement of a hostile exchange offer for all outstanding shares of Hollywood Entertainment Corporation. The review for downgrade in relation to Blockbuster's long term ratings is based on (1) the likelihood that the exchange offer, if successful, would result in significantly higher leverage and weaker credit metrics, as well as (2) the risk that the recent elimination of late fees could constrict earnings and cash flow. The downgrade of the speculative grade liquidity rating from SGL-1 (very good liquidity) to SGL-2 (good liquidity) reflects Moody's expectation that the elimination of the no late fee policy will reduce liquidity in the near term, as well as reducing the amount of cushion that currently exists in the financial covenants in Blockbuster's credit agreement.

Currently, Movie Gallery has a definitive agreement to acquire Hollywood Entertainment for $13.25 per share cash plus the assumption of debt for a transaction value of $1.2 billion. Blockbuster has offered to exchange all of the outstanding shares of Hollywood Entertainment for $14.50 per share, comprised of $11.50 per share cash and $3.00 per share in Blockbuster Class A common stock for a transaction value of $1.3 billion. Blockbuster has received commitments for $1 billion in bank and bond debt to finance the proposed transaction. The offer is subject to various conditions including; a majority of the shares being validly tendered and the termination of the merger agreement with Movie Gallery. It is therefore unclear whether Blockbuster's exchange offer will be successful and whether other bids could surface.

The review for possible downgrade will focus on the financial profile of Blockbuster post acquisition should its hostile bid be successful. Whether or not the bid is successful, the review will evaluate the impact of the elimination of late fees on Blockbuster's earnings and cash flow, as well as management's financial policies going forward, including its risk appetite for acquisitions.

The SGL-2 speculative grade liquidity rating reflects Moody's expectation that the company will maintain good liquidity. Internally generated cash flow and cash on hand will be sufficient to fund its working capital, capital expenditures, term loan amortization, and dividend requirements over the next four quarters. In addition, the company will have sufficient liquidity to meet the 50% excess cash flow requirement beginning in the first quarter of 2006. Cash on hand at September 30, 2004 was $190.0 million. However, Blockbuster's cushion for complying with the financial agreements in its bank credit facilities is likely to be reduced, in Moody's view, by the elimination of late fees which could constrict earnings and cash flow. In addition, given Blockbuster's limited tangible assets, the company has limited sources of alternative liquidity other than the sale of the entire company, its international business, or its extensive customer database.

The following ratings have been placed on review for possible downgrade:

Senior Implied of Ba2;

Long Term Issuer Rating of Ba3;

Senior Secured Bank Credit Facilities of Ba2;

Senior Subordinated Notes of B1.

The following rating has been downgraded:

Speculative Grade Liquidity Rating to SGL-2 from SGL-1.

Blockbuster Inc., headquartered in Dallas, Texas, is a leading global provider of in-home movie and game entertainment with nearly 9,000 stores throughout the Americas, Europe, Asia, and Australia. Total revenues for fiscal year 2003 were approximately $5.9 billion.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Margaret Lane
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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