Blockbuster gets another break from its debt holders

With big interest payments looming and its losses mounting, Blockbuster Inc. has bought some extra time from its debt holders to form a new recapitalization agreement.

The postponement gives the struggling DVD rental chain until the end of September to restructure its debt. It’s the second such extension the company has received. If it is unable to reach an accord, Blockbuster will probably have to file for bankruptcy because it is unable to make its interest payments. Even if it does reach a restructuring pact, Blockbuster warned investors, it may still have to file for Chapter 11 reorganization given the continued deterioration of its business.

Dallas-based Blockbuster is still the largest DVD rental chain but has seen its business severely diminished by the rise of Netflix, a DVD-by-mail company, and Redbox, which operates DVD rental kiosks. On Friday, Blockbuster reported a 20% drop in revenue to $788 million for the quarter that ended July 4. Its net loss grew 86% to $69 million as the company closed 507 stores in the first half and as the more than 5,800 worldwide that remained open saw continuing declines.

During the quarter, Blockbuster launched a marketing partnership with cable television giant Comcast Corp. and began offering video games through its rent-by-mail service, which Netflix does not offer. It has also noted in promotions that it gets movies from three studios — 20th Century Fox, Universal Pictures and Warner Bros. — 28 days earlier than Neflix and Redbox.

Nonetheless, Blockbuster’s financial situation remains dire as it is severely short on cash and unable to invest in growth. As of July 4 it had $64.3 million in cash and $920.4 million in debt.

Almost $600 million of that debt is senior secured notes, on which an interest payment was due Friday. The company persuaded holders of 70% of that debt to extend an interest forbearance agreement until Sept. 30.

Blockbuster also has $300 million worth of senior subordinated notes, with an interest payment due Sept. 1. The company said there is a “substantial likelihood that such payment will not be made as scheduled,” adding to the pressure on it to reach a recapitalization agreement as soon as possible.

In a statement, Blockbuster Chief Executive Jim Keyes said, “Our objective is to complete a recapitalization as soon as possible so we are better positioned to focus our attention and resources on the strategic opportunities to continue our business transformation.”

Blockbuster stock closed down 4.5 cents, or 25%, to 13.5 cents on Friday.