Blockbuster expected to file for Chapter 11 within days

Blockbuster Inc (BLOKA.PK) is preparing to file for Chapter 11 bankruptcy within the next few days, a source familiar with the video rental chain's plans said on Wednesday.

The Dallas-based retailer has more than $900 million of debt and has struggled to adapt as consumers download movies from their computers rather than go to free-standing rental stores.

Blockbuster is working with debtholders to craft a plan in which it would continue operating but shutter hundreds more stores, said the source, who was not authorized to speak publicly about the situation. A bankruptcy filing is expected as early as Wednesday.

The details were originally reported in the Wall Street Journal.

Under the proposed plan, senior bondholders would convert about $630 million of debt into equity of the restructured company. The other bondholders would be wiped out, according to this source.

"We continue to explore all of our options and are making good progress in our recapitalization process," Blockbuster said in an emailed statement on Wednesday.

"Our discussions with the studios and bondholders continue to be productive, and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future."

Investor Carl Icahn holds about one-third of the senior debt, the source said.

Icahn was not immediately available to comment.

Senior bondholders have agreed to provide the company with a loan of about $125 million to help support operations while it is under bankruptcy protection, according to the source.

The company said in its statement that it had the support "of a wide range of parties" and that it was working on putting in place "a more appropriate capital structure to support Blockbuster's long-term growth, including investments in our multi-channel platform and new opportunities."

As of early this year, Blockbuster had more than 6,500 stores in the United States and internally. The company has introduced a movie download service to move beyond retail locations, but that service's popularity lags behind Netflix Inc's (NFLX.O) offerings.

Shares of Blockbuster were down 17.5 percent at 6.6 cents in morning trading.