Movie Gallery faces risk of bankruptcy: analysts

By Gina Keating

LOS ANGELES (Reuters) - Shares of Movie Gallery Inc. MOVI.O have swung wildly in recent months as investors ponder whether the debt-laden No. 2 U.S. movie rental chain will be forced by its creditors to declare bankruptcy.

After a yearlong respite from some provisions of its debt agreement, Movie Gallery said this week that it likely will not be in compliance in the current quarter unless it renegotiates those agreements for a third time.

Three analysts said the company faced a rising risk of bankruptcy unless its creditors agree to a new waiver and the company moves more aggressively to cut store expenses.

But the analysts differed over whether creditors would take another chance on Movie Gallery after a year of declining rental revenues and increased competition from Blockbuster Inc. (BBI.N) and Netflix Inc (NFLX.O).

"I don't see what the benefit would be to the lenders to force the company into bankruptcy," Margaret Taylor, a senior analyst at Moody's Investors Service, said on Tuesday.

"I think it is likely they will come to some sort of resolution," Taylor said. "The best thing for the company to do is to continue operating in hopes of improving its bottom line."

Wedbush Morgan Securities analyst Michael Pachter forecast a break-even year for Movie Gallery in 2007, but said the company's creditors "aren't going to get repaid their principal unless you cut (operating expenses) with a chain saw."

The company said on Monday that it expects to announce plans this quarter to improve its capital structure for the long term, including possibly issuing debt or equity and selling assets.