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Rating Action:

MOODY'S ASSIGNS Ba2 TO IMAX'S PROPOSED SR NOTES OFFERING; CONFIRMS EXISTING B1 RATING ON CONVERTIBLE SUB NOTES

25 Nov 1998
MOODY'S ASSIGNS Ba2 TO IMAX'S PROPOSED SR NOTES OFFERING; CONFIRMS EXISTING B1 RATING ON CONVERTIBLE SUB NOTES Moody's Investors Service assigned a Ba2 rating to the proposed $200 million issue of senior unsecured notes due 2005, and confirmed the B1 rating on the existing $100 million of 5-3/4% convertible subordinated notes due 2003, of Imax Corporation (Imax). Proceeds from the proposed issuance of the senior notes will be partially utilized to call Imax's existing $65 million of 10% senior unsecured notes, the Ba2 rating for which Moody's will withdraw upon redemption of the same by the company. Imax's senior implied rating is Ba2. The rating outlook is stable.

The ratings reflect various risks related to the company's plan to broadly commercialize its large-screen theaters, including higher penetration of 3D systems and expansion into the management and ownership of equity interests in theaters, notwithstanding management's limited experience with the latter; the increasingly competitive market for general out-of-home entertainment and the movie exhibition industry more specifically, with the potential for technological obsolescence if a more competitive presentation format is developed; increased financial leverage proforma for the proposed security offering; and the risks of insufficient and/or unsuccessful commercial film product available in large-screen format to fill the increased capacity created by the company's aggressive expansion and still rapidly growing theater network.

Positive considerations supporting the ratings include Imax's leading worldwide position and well-recognized brand name in the fast growing large-format film industry, with increasing geographic diversification providing both a hedge against regional and/or country cyclicality and a means to support further growth; an improving credit profile, with evidence of continued rapid growth and strong operating results, and expectations of good liquidity following the proposed offering; and the critical mass of the company's existing theater network and growing film library on a prospective basis to incorporate contracts in backlog, which enhances the stability and recurring nature of its revenue stream and strengthens cash flow coverage of proforma debt service given the high-margin nature of its business.

Imax operates in a growing but rapidly changing competitive environment and is at risk from the development of alternative film projection and production technology that may increase pressure on its currently high margins. However, the ratings incorporate Imax's strong potential to maintain and/or grow its market share as the company further diversifies its product line beyond its traditional outlets (i.e.; museums and theme parks) and establishes more depth in its international franchise and a growing presence in commercial theater venues with its new SR product. Competitive risk could be heightened, however, given the company's ongoing shift from the institutional to the commercial sector, particularly if this strategy is successful, which could alter the currently attractive economics and operating performance of its business. In this regard, Moody's notes its concerns with the company's long-dated lease terms and receivables, which could be adversely impacted if a competitive technological offering is developed.

Until last year, Imax had principally focused on supplying technology to IMAX theaters built and owned by third-party operators. More recently, management has begun, and will continue, to augment and broaden its revenue mix by developing and operating its own theaters, either on an exclusive or joint venture basis. In addition to the new challenges associated with managing its own theaters, management must take care to avoid market saturation through overlaps with the present IMAX theater network. Management will also attempt to increase production of its own large format and 3D films, broaden its distribution, and alter the revenue sharing mix by initiating its own nationwide marketing of IMAX theaters in exchange for a larger share of box office receipts. Although these initiatives will increase financial risk by immobilizing capital and, to a lesser extent, introducing box office risk which has generally been absent historically, there is considerable upside potential in terms of higher revenues and enhanced returns to be realized from maintaining an equity participation in its films and theaters.

Imax's liquidity position will grow considerably proforma for the issuance of the proposed debt issue, with just $70 million of debt and preferred securities slated for redemption. Excess cash balances will be utilized to continue funding the development of new theaters and films, IMAX Ridefilm theaters, and the purchase of new film distribution rights. Financial leverage will grow by approximately one and one-half turns against reported cash flow proforma for the proposed transactions, and will remain moderately high near-term, with a debt to book capitalization ratio exceeding 75%. Moody's ratings inherently assume that management will be able to continue with its highly successful track record of new system signings, which ultimately drive Imax's business and subsequently add some stability to the company's ability to generate cash flow through the ongoing collection of higher royalty, lease, and maintenance payments as a result of a larger network.

Over the near-term, Imax will be supported by a healthy backlog of orders for its systems. Imax's sizable operating margins have historically been produced by its unique position in the market and lack of a viable competitive product. The company's diverse customer base and long list of products in operation provide it with a firm base of recurring revenues. Despite a large increase in debt from the proposed notes issuance, which is more than three times the size of the notes that will be refinanced by means of early redemption, Moody's expects cash flow coverage of interest to be in excess of 2.5x on a proforma basis at 12/31/98. It is expected that capital expenditures will be self-financed with cash flow from operations, although investments in additional film assets, as well as owned-and-operated and joint-venture theaters, will likely reduce the company's currently high cash balances over the intermediate term. Liquidity is not a near term concern, however, with approximately $193 million of cash and equivalents on hand proforma for the proposed transaction, Cdn $10 million in available bank credit, and a sizable business backlog of nearly $200 million. The ratings could come under downward pressure, however, if this excess liquidity is utilized to materially alter management's business plan, particularly with respect to additional film financings, theater ownership, advance marketing expenditures, and/or dividend payments.

Moody's believes that Imax's operating results will continue to improve over the next several years, which should offset the higher interest expense created by the increase in outstanding debt. Although we would not likely impute any positive benefit to the new senior noteholders, the company may also have the opportunity to exercise its soft-call on the convertible notes, assuming Imax's public common stock price reaches $30/share by 4/1/99, and thereby reduce its debt service requirements by nearly $6 million a year thereafter.

Imax Corporation, headquartered in Mississauga, Ontario, is the leading worldwide provider of giant-screen theater equipment and large format films.

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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