BLOCKBUSTER BANKRUPCY?

Blockbuster Inc. (BBI) again warned it may have to file for bankruptcy protection as the movie-rental giant continues to lose money.

In its annual report filed Tuesday, Blockbuster said its declining sales and cash flow, coupled with increasingly competitive industry conditions, "raise substantial doubt about our ability to continue as a going concern." Blockbuster provided similar warnings nearly a year ago before it was able to refinance its long-term debt in the fall.

Nonetheless, the latest warning reminds investors of the serious challenges that the company faces.

Blockbuster is scrambling to expand in new distribution channels as rentals and sales at its 6,500 stores worldwide continue to decline amid intense competition from by-mail movie-rental services such as Netflix Inc. (NFLX) and rental kiosks such as those operated by Coinstar Inc.'s (CSTR) Redbox unit.

As of Jan. 3, Blockbuster said its total liabilities were $314.3 million more than its total assets.

Blockbuster shares fell 29% to 28 cents in recent trading. Blockbuster's 9% notes due 2012 are down 2.9 points to 22 cents on the dollar in very active trade Wednesday, according to MarketAxess.

Blockbuster has its own brand of by-mail service and kiosks, owned and operated by NCR Corp. (NCR), and it has worked with TiVo and other electronics makers to boost its digital-download offerings. But those businesses so far haven't taken off quickly enough to offset the declining rentals and sales at its stores.

Indeed, while Blockbuster's filing Tuesday said NCR expected to have 10,000 kiosks under the Blockbuster Express brand name by mid year, NCR has about 4,000, some of which are operating under kiosk brands NCR purchased last year. And an NCR spokesman called "inaccurate" Blockbuster's characterization, reiterating that NCR expects to have as many as 10,000 kiosks by year end, and some will not be under the Blockbuster name.

With its growth efforts constrained by debt and declining cash flow, Blockbuster is closing hundreds of underperforming stores, including 500 to 545 this year, and has outlined $200 million in fresh cost cuts tied to staffing and advertising spending. Since last year, it has pursued options for overseas assets, selling its business in Ireland in August for up to $45 million in cash, but it so far has been unable to close deals on other divestitures.

Blockbuster said Tuesday that it also seeks to boost its balance sheet, including modifying terms of its senior notes and the possible swap of senior subordinated debt with Class A common stock. The exchange could be implemented in late second quarter or early third quarter, but some of potential moves may require the company to file a pre-packaged or other filing under Chapter 11 bankruptcy-protection laws, Blockbuster said.

"It may not be possible to turn Blockbuster's business around," Gimme Credit analyst Kim Noland said. "While its high-yield issuance last fall appeared to buy it some time, its recent negative revision in guidance and the inroads into its business by competitors bode very ill for its long term health."

Noland said Blockbuster isn't yet in a liquidity crunch, but it could be if the poor results of the fourth quarter are repeated.

CIT's shares, bonds plunge on bankruptcy fears

Shares of embattled U.S. lender CIT plummeted and its debt sold off steeply on Thursday on escalating fears about a potential bankruptcy after the company said bailout talks with the government had ended.

The announcement late Wednesday followed last-ditch talks in which U.S. Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year-old company, which lends to hundreds of thousands of small and mid-sized U.S. businesses.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

"As a result, we expect the company to file for bankruptcy in short order," they added.

CNBC, citing a source close to the company, has said CIT is now pursuing a plan that is likely to include a Chapter 11 bankruptcy filing on Friday.

The company's stock swooned more than 80 percent to as low as 31 cents in early trading on the New York Stock Exchange as it reopened after being suspended on Wednesday afternoon.

CIT's 5 percent notes due in 2014 fell to 52 cents on the dollar early on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

The company was not immediately available to comment.

If CIT were to go bankrupt, it would join Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) among large financial companies to collapse since the credit crisis accelerated last September.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "we believe the figure is in the range of $4 billion to $6 billion plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

Costs to insure CIT's debt against the risk of default surged. CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

SAD END

CIT's problems surfaced two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans, both potentially highly profitable but fraught with added risk.

Founded in St. Louis in 1908, CIT boasts on its Website that a million business customers depend on it for financing.

Many may now have to turn to another firm at a time when credit markets remain tight, reducing business activity as the government tries to lift the economy out of a deep recession.

CIT sought new help even after winning bank holding company status in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

The U.S. Treasury Department had been considering an aid package that could have included a temporary loan, access to the Federal Reserve's discount window, or asset transfers to CIT's banking unit, a person familiar with the matter said. The person requested anonymity because the talks were private.

Federal Deposit Insurance Corporation Chairman Sheila Bair, whose office is already under strain as banks fail by the dozens, had been reluctant to let CIT issue government-guaranteed debt, believing that a program allowing such issuance was designed for healthy institutions.

"This marks a sad end for the 100-plus-year-old finance company," Stifel Nicolaus analysts said.