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Blockbuster finally files for Chapter 11

Company has filed for bankruptcy reorganization. If the process goes as Blockbuster hopes, it will shrink its debt from $1 billion to $100 million.

Blockbuster has had a rough few years, but this one has been especially painful.

First, its shares were delisted from the New York Stock Exchange. And now, as expected, it has filed for Chapter 11 bankruptcy reorganization as it struggles to compete with online video-rental service Netflix and the rental-kiosk phenomena.

Calling it "prearranged recapitalization," Blockbuster announced today that it has filed Chapter 11 petitions in the U.S. Bankruptcy Court. The reorganization encompasses only the company's U.S.-based operations and stores that it wholly owns. International operations and franchises are not included in the filing, Blockbuster said.

However, the reorganization does encompass quite a bit. According to the company, all of its stores, by-mail service, and streaming operation are included in the proceedings.

In the run-up to its filing, Blockbuster struck deals with about 80 percent of bondholders on the company's senior secured notes. The goal, according to Blockbuster, was to reduce the current $1 billion debt on its balance sheet down to a more manageable $100 million or so.

To achieve that goal, Blockbuster said that its senior secured notes will be "exchanged for the equity of a reorganized Blockbuster." In other words, current secured noteholders will soon own a slice of the rental firm. The company will also receive $125 million in new financing from the senior noteholders, which Blockbuster expects, will be the only debt on its balance sheet if and when it emerges from Chapter 11. That $125 million will be used to help the company operate as normal during the bankruptcy proceedings.

Because Blockbuster has filed for reorganization, outstanding debt outside of the senior notes, as well as preferred and common stock holders, will have no recourse to collect what they're owed from the company.

Blockbuster is also planning to take a harder look at its operations. Although its 3,000 stores are still operating normally, Blockbuster said, it plans to "evaluate its U.S. portfolio."

If and when it emerges from Chapter 11, Blockbuster expects to be in a better position to compete against Netflix and its other rivals.

Correction at 7:30 a.m. PDT: The DVD vending kiosks are owned by NCR and are not part of the bankruptcy proceedings.