Billionaire investor Carl Icahn and other senior bondholders will swap their debt for all of the company’s stock, while providing a $125m (£80m) loan so the chain can operate during bankruptcy.
Under the proposed plan, senior bondholders would convert about $630m of debt into equity of the restructured company. The other bondholders are expected to be wiped out completely.
The plan will allow the company to continue operating, although it is expected to close hundreds of stores and invest more in online video rental, putting it in direct competition with Netflix.
It is carrying some $900m of debt, according to filings with US regulators.
“We continue to explore all of our options and are making good progress in our recapitalisation process,” Blockbuster said in an statement last night.