Moody's upgrades Movie Gallery revolver to B1

Moody's Investors Service said it upgraded Movie Gallery Inc.'s $100 million senior secured revolving credit facility to B1 (LGD1, 9%) from B2 (LGD3, 33%) and affirmed the company's Caa1 corporate family rating, B3 probability-of-default rating, SGL-3 speculative grade liquidity rating, Caa1 (LGD4, 66%) $175 million senior secured second-lien term loan and Caa2 (LGD5, 88%) senior unsecured guaranteed notes.

The $25 million synthetic letter-of-credit facility and $600 million senior secured first-lien term loan were affirmed at B2 (LGD3), but the loss-given-default rate on the loans was changed to 39% from 33%.

The outlook remains positive.

The agency said upgrade follows the company's revision of its new capital structure and reflects the revolver now being a "first-out" revolver that will get paid ahead of the other first-lien debt in the event of a default. In addition, the capital structure changed such that the first-lien term loan was increased to $600 million from the original $525 million and the second-lien term loan was decreased to $175 million from the original $250 million. The total amount of the debt in the capital structure remains unchanged.

The Caa1 corporate family rating reflects the continued eroding competitive position of Movie Gallery's Hollywood Entertainment subsidiary; the numerous threats the home video rental industry faces; the company's very weak credit metrics, high seasonality and aggressive financial policies; and the company's very limited financial flexibility due to the high leverage it incurred in order to finance its acquisition of Hollywood Entertainment in early 2005, Moody's said.

Balancing out these weaknesses is the company's national diversification, credible market position and its scale with $2.5 billion in annual revenues, the agency said.

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