Hollywood Entertainment's solid market share of the video retailing industry provides support to the new $250 million credit facility, despite the company's subordinate ranking to industry-giant Blockbuster. Hollywood controls 11% of the market share, compared to Blockbuster's 40% share. But, "The rest of the market is pretty fragmented," said Diane Shand, Standard & Poor's analyst. The rating agency has assigned a BB- rating to the credit.
Moody's Investors Service has also signed off on the credit with its corresponding prospective rating of Ba3. While the new credit increases Hollywood's near-term debt, Moody's notes that it will also push out the company's debt maturities and improve its liquidity in the intermediate term. The new financing package for Hollywood also includes a $200 million issue of senior notes rated B- by S&P and B3 by Moody's. The new financing is tagged to refinance existing debt.
In addition to its market position, Hollywood's operating performance is expected to strengthen. "We think the performance will improve over the next few years due to better store execution," noted Shand. She explained that the management is taking on new initiatives such as the expansion of its Game Crazy departments, an in-store mart where customers can buy, sell and trade video games. As operating performance improves, credit protection measures are also likely to improve. Currently, Hollywood's interest coverage ratio clocks in at 1.9 times and its leverage ratio reaches a high five times.
Competitive factors in the industry have put pressure on the ratings for the Wilsonville, Ore.-based company. For a number of years, Hollywood studios have been offering films at low prices to encourage consumers to purchase new DVDs as well as videos, instead of rental, explained Shand.
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