Fitch Affirms Blockbuster's IDR at 'CCC'; Outlook Stable

In addition, Fitch takes the following rating actions:

--$450 million bank credit facility upgraded to 'B/RR2' from 'CCC+/RR3';

--$100 million term A loan upgraded to 'B/RR2' from 'CCC+/RR3';

--$550 million term B loan upgraded to 'B/RR2' from 'CCC+/RR3';

--$300 million senior subordinated notes downgraded to 'C/RR6' from 'CC/RR6'.

The Rating Outlook is Stable. The company had approximately $818 million of debt outstanding as of Jan. 4, 2009.

The affirmation of the IDR reflects the company's leading market position, strong brand recognition and operating strategy that has improved the company's operating performance in 2008. In addition, the ratings consider BBI's improved liquidity available to meet its near-term capital and debt service requirements following the announcement that the company has amended its facility which is expected to be funded on or about May 11, 2009. Nonetheless, liquidity remains a concern as the amended facility expires in September 2010, and required amortization and prepayments over the next 18 months total approximately $311 million. Also of concern are constraints on capital investments in the amended bank facility which could hinder the execution of the company's operating strategy as well as intense competition from various channels. The upgrades of the bank credit facility, term A loan and term B loan as well as the downgrade of the senior subordinated notes reflect a revised recovery analysis described below and Fitch's revised rating definitions as of March 2009.

BBI is the leading player in the home video rental industry with $5.3 billion in revenues in 2009. The company's strong brand recognition and broad geographical coverage have resulted in BBI maintaining an approximately 37% market share in the home video rental market in 2008. In addition, as a result of management's implementation of its three-prong strategy of 1) restoring the rental business, 2) transitioning from rental focus to retail focus and 3) transforming from DVD focus to digital, BBI generated $300 million of EBITDA in 2008 compared to $176 million in 2007. Given the improvement in operating results, credit metrics have strengthened with 2008 adjusted debt/EBITDAR and EBITDAR coverage of interest and rents of 6.1x and 1.4x, respectively, compared to 7.3x and 1.1x, respectively, in 2007. Of ongoing concern is the intense competition in the industry. In its store-based business, BBI competes with other video-rental chains, discounters and specialty retailers. In its online business, the company competes with other online video rental providers as well as competing technologies such as video-on-demand, pay-per-view and digital video records. As a result, Fitch expects BBI's same store sales to be pressured in 2009, but cost reduction initiatives should help offset some of the pressures. This will lead to 2009 credit metrics to be at similar levels as 2008.

In addition, BBI has adequate near-term liquidity, mainly from the recently amended $250 million credit facility, to meet its capital and debt service requirements. However, the facility limits the company's investments in its business given the restriction on capital expenditures of $30 million in 2009 and $40 million in 2010 as well as mandatory amortization payments on the facility beginning on Dec. 15, 2009. In addition, BBI faces a refinancing risk in 2010 given the level of debt service requirements over the next 18 months and expected pressures on its business due to a challenging and competitive operating environment.

The Recovery Ratings reflect Fitch's recovery expectations in a distressed scenario. Fitch's recovery analysis assumes a liquidation value of $602 million in a distressed scenario. This is based on an 80% recovery rate in accounts receivables, 50% recovery rate in inventory and property and equipment and 25% recovery rate in rental library. Applying this value across the capital structure results in superior recovery prospects (71%-90%) for the bank credit facility, term A loan and term B loan which resulted in an upgrade to 'B/RR2' from 'CCC+/RR3'. These securities are secured by land, buildings, improvements, equipment, furniture, permits, licenses, subleases, and real estate tax refunds owned by BBI as well as collateralized by pledges of stock of all of the company's domestic subsidiaries and 65% of the stock of certain international subsidiaries. The senior subordinated notes are downgraded to 'C/RR6' from 'CC/RR6', reflecting poor recovery prospects (0%-10%) in a distressed case and Fitch's revised rating definitions.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

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