Fitch Downgrades Blockbuster's IDR to 'C'

Fitch Ratings has taken the following rating actions on Blockbuster Inc. (Blockbuster):

--Long-term Issuer Default Rating (IDR) downgraded to 'C' from 'CCC';

--$675 million senior secured notes downgraded to 'CC/RR3' from 'B/RR2';

--$300 million senior subordinated notes affirmed at 'C/RR6'.

At Jan. 3, 2010, Blockbuster had approximately $963.6 million of debt outstanding.

The downgrade of Blockbuster's ratings follows the company's 10-K filing which outlined its initiative to exchange all or a part of its senior subordinated notes for class A common stock. The company may also seek certain modifications to the senior secured notes. Assuming that an agreement can be reached with the holders of the notes in terms of an exchange, an exchange will occur during the latter part of the second quarter or early part of the third quarter of this year. Blockbuster also stated that it is possible that a successful exchange will require the company to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Fitch believes the transaction as contemplated constitutes a coercive debt exchange (CDE) which is considered a default as outlined in Fitch's global criteria report, 'Coercive Debt Exchange Criteria', published on March 3, 2009. In the event that a CDE is successful, Fitch will downgrade the IDR of Blockbuster to 'RD' from 'C'. Following the downgrade, Fitch will review the company's credit profile and its modified capital structure and assign a new IDR accordingly. However, if the CDE is unsuccessful, Fitch views the probability of a default or bankruptcy as very high. In such a situation, the IDR will likely remain at 'C' until a default occurs or until the company's financial performance and credit profile improve sufficiently to warrant an upgrade.

Fitch remains concerned about the company's operating model and pressures on its business due to the changing industry dynamics and intense competition from various channels. Given the deteriorating operating performance, Fitch expects credit metrics will continue to weaken in 2010. However, Fitch believes Blockbuster maintains adequate liquidity to make its April 1, 2010 debt payment of $43 million. At 2009 fiscal year-end, Blockbuster had $247 million in cash and cash equivalents, which includes $59 million in restricted cash.

The ratings on the company's $675 million senior secured notes and $300 million senior subordinated notes are derived from the IDR and the relevant Recovery Ratings (RR). Fitch's recovery analysis assumes a liquidation value of $423 million in a distressed scenario. Applying this value across the capital structure results in a rating downgrade to 'CC/RR3' from 'B/RR2', indicating good recovery prospects (51%-70%), for the senior secured notes. The senior secured notes are guaranteed by Blockbuster's domestic subsidiaries and are secured by a first-priority lien on substantially all of the company's and the guarantors' assets such as land, buildings, improvements, equipment, furniture, permits, licenses, subleases, and real estate tax refunds owned by Blockbuster as well as collateralized by pledges of stock of all of the company's domestic subsidiaries. The senior subordinated notes are affirmed at 'C/RR6', reflecting poor recovery prospects (0%-10%) in a distressed case.

Applicable criteria reports are available at www.fitchratings.com:

--'Corporate Rating Methodology', dated Nov. 24, 2009;

--'Operating Leases: Updated Implications for Lessees' Credit', dated Aug. 13, 2009;

--'Coercive Debt Exchange Criteria', dated March 3, 2009;

--'Evaluating Corporate Governance', dated Dec. 12, 2007;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

--'Short-term Ratings Criteria for Corporate Finance', dated June 12, 2007.

Additional information is available at www.fitchratings.com.

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