OCT. 16 | Movie Gallery this week finally filed a prepackaged Chapter 11 bankruptcy.
Although some held out hope the bankruptcy would not be necessary, it had been expected by many in the industry.
“Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through closing unprofitable stores, headcount reductions and other means, these actions were not sufficient to offset the significant shift in our business and the cost of our substantial debt obligations,” Movie Gallery chairman, president and CEO Joe Malugen said in making the announcement.
“After careful consideration of all available alternatives, the company’s board of directors determined that a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for a successful restructuring,” he said.
Movie Gallery had received extensions to its loans, but those ended Sept. 30.
Its stock has been battered over the last few months and was around 23¢ after the bankruptcy news.
Debt key problem
The company’s more than $1 billion in debt, which had been a chief source of its financial problems, will be restructured under a proposal that would eliminate $400 million of the debt and reduce future interest expenses.
The bankruptcy filing lists the company’s current debt at $1.4 billion and assets of $892 million.
The prenegotiated restructuring agreement calls for Sopris Capital Advisors to invest $50 million in Movie Gallery. Additionally, $325 million in bonds and other unsecured claims will be converted into new equity in the reorganized company, along with about $72 million of the company’s $175 million in second-lien debt, held by Sopris.
The terms for the remaining second-lien debt will be amended, and Movie Gallery’s first lien will be restructured also under terms to be agreed on.
Movie Gallery was granted interim court approval to tap $140 million of its $150 million debtor-in-possession financing agreement arranged by Goldman Sachs Credit Partners. The funds will be used to refinance the company’s existing credit facility at a lower interest rate and provide the company with additional working capital for such purposes as paying vendors and employees. A final debtor-in-possession hearing is scheduled for Nov. 6.
All of the retailer's "first day" motions were approved by the court, including allowing it to honor its current customer policies.
Additionally, current holders of Movie Gallery’s common equity will get an estimated 2% of the equity in the reorganized company, subject to certain circumstances. The existing common stock will be canceled.
The company will continue operating during the bankruptcy. The Canadian subsidiary will not be part of the filing.
Vendor payments
The announcement said vendors will be paid for purchases after the date of the filing. Among the motions in the filing is a request by Movie Gallery to make some payments to studios for product it purchased before the filing.
After a bond from U.S. Bank Corporate Trust Services, the eighth largest creditors are listed in the filing as Paramount Home Entertainment ($11.2 million), Sony Pictures Home Entertainment ($10.9 million), 20th Century Fox Home Entertainment ($7.6 million), Warner Home Video ($6.9 million), Universal Studios Home Entertainment ($5.1 million), VPD ($3.7 million), Lions Gate Entertainment ($2.3 million) and First Look Home Entertainment ($1 million).
The filing also includes a motion by Movie Gallery to get out of some of its store leases. The motion indicates the company has decided it wouldn’t be cost-effective to sublease the stores, a plan Movie Gallery had been considering. A list of affected Hollywood Video and Movie Gallery locations is included with the motion.
Another motion asks to auction leases for most of the stores that have already been announced for closure and includes a schedule of dates related to the auctions, mostly in November. The company recently confirmed it is closing 520 unprofitable stores as part of its effort to bring itself back to financial health, bringing the company down to about 4,000 stores.
The company did not say when it believes it will emerge from bankruptcy, but a story earlier this month by the Wall Street Journal cited sources as saying the company will be cleared by early next year.
The debt Movie Gallery incurred to acquire Hollywood Entertainment, coupled with changes in the industry such as the increased competition between Blockbuster and Netflix over mail-order rentals, were key factors in leading Movie Gallery, once a thriving rental chain catering to small- and mid-size markets, into its current financial crisis.
GET MORE:
• Comprehensive information related to the bankruptcy
• Additional information at the Movie Gallery Web site under "Reorganization"
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