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Rating Action:

MOODY'S ASSIGNS Ba3 RATING TO LODGENET ENTERTAINMENT'S PROPOSED BANK CREDIT FACILITIES; B1 RATING FOR EXISTING SR NOTES CONFIRMED

27 Jun 2001
MOODY'S ASSIGNS Ba3 RATING TO LODGENET ENTERTAINMENT'S PROPOSED BANK CREDIT FACILITIES; B1 RATING FOR EXISTING SR NOTES CONFIRMED

Approximately $375 Million of Debt Securities Affected

New York, June 27, 2001 -- Moody's Investors Service assigned Ba3 ratings to the combined $225 million of proposed senior secured bank credit facilities being arranged for LodgeNet Entertainment Corporation (LodgeNet), including a $75 million revolver and a $150 million term loan, both due 2006. The B1 rating for LodgeNet's $150 million existing issue of 10-1/4% senior unsecured notes due 2006 was confirmed, while the former Ba3 ratings for the company's existing senior secured bank credit facilities were withdrawn. The company's senior implied rating is Ba3. The senior unsecured issuer rating for LodgeNet is B1. The rating outlook is stable.

The ratings reflect the substantial capital investments and long pay-back periods for the company's business; resultant ongoing expectations of negative free cash flow generation as anticipated to continue over the next few years; and moderately high financial leverage and modest debt service coverage for the company's industry niche in particular. Moody's also made note of recent negative trends with respect to movie buy rates and video revenue generated on a per room basis, and the concern that this may be the beginning of a more extended pattern over time. Finally, the ratings continue to incorporate the impact of seasonality, competition, and general economic cyclicality inherent in the lodging industry, including the likelihood of reduced occupancies and/or buy rates over the ensuing rating horizon; the company's dependence on film studios for quality product; and a high degree of market saturation, which limits the prospects for domestic growth in installed rooms.

Positive considerations supporting the ratings and stable outlook include the company's exclusive long-term contracts, in conjunction with the general stability of the lodging industry over more prolonged periods of time; the company's ability to meet Moody's expectations in virtually all regards to date, with evidence of good growth in its installed room base in particular; prospects for further revenue and cash flow growth through the rollout of broadband Internet and/or other in-room entertainment services, as well as potential cost savings through the deployment of advanced digital technologies; and the essentially variable nature of capital expenditures. Moody's also noted that the recent signing by the company of the Hilton contract would likely bode well for future growth, with access to an additional 350,000 rooms, notwithstanding the more significant capital costs associated with such expansion.

The senior implied equivalent Ba3 rating assigned to the company's proposed bank credit facilities further reflects the large size of this debt class in the context of the overall capitalization of the company. The banks do continue to be better protected than holders of the company's senior unsecured notes, nonetheless, by virtue of their security interest in the assets of the company, including what Moody's continues to believe represent high value associated with its existing contracts. The B1-rated senior notes also reflects the weaker relative rank of this debt class to the secured bank debt in particular, and the presence still of approximately $29 million of remaining private notes with which they are pari-passu but which amortize sooner.

Drawdowns under the company's increased bank facilities will be used to refinance its existing credit lines initially, and will be available to support the added capital expenditure requirements associated with the new Hilton hotel contract. Excess availability will subsequently be available to support additional future growth, as well as the planned conversion of existing rooms under contract from a tape-based system of distribution for on-demand movies to a more advanced server-based system . Given that the company's contracts are largely back-ended with respect to the return on invested capital, Moody's continues to believe that LodgeNet will remain a net borrower for the next few years.

In October 2000, LodgeNet signed a seven year master services agreement with Hilton Hotels which potentially gives the company access to over 350,000 owned, managed and franchised rooms. LodgeNet expects to phase in the additional rooms over the next five years. Additionally, the company will be the preferred provider of interactive services for Hilton's managed and franchised hotels. In conjunction with this contract award, Hilton and LodgeNet created Inn Media, a 50/50 joint venture, to develop interactive television content which will be accessed via LodgeNet's platform. Each will contribute $5 million to the partnership.

Between LodgeNet and On Command, the company's chief competitor and the market leader, the market for distribution of on-demand video and video game entertainment has become saturated for hotels containing 150+ rooms. LodgeNet's growth of its installed base will largely be limited to installation in hotels with 75+ rooms, which may be economically less appealing notwithstanding the reported scaleability of its system design, and also to taking competitor market share, which it was able to do with the Hilton contract but which also occurs much more infrequently in the sector.

While LodgeNet's position in the marketplace appears to be strengthening, the company remains exposed to a number of factors that it has little or no control over. The company is reliant on hotel occupancy rates, which are higher during the second and third quarters due to seasonal travel patterns. Occupancy and service buy rates, which drive the company's top-line performance, are heavily impacted by economic trends, more broadly. Finally, buy rates are also impacted by the quality of film product released to the company by motion picture studios.

LodgeNet provides cable, video-on-demand and video game entertainment services to the lodging industry. The company maintains its headquarters in Sioux Falls, South Dakota.

New York
Michael Rowan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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