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18 Dec 1997
MOODY'S ASSIGNS Caa2 TO GTD SENIOR SUBORDINATED NOTES OF PRODUCTION RESOURCE GROUP, L.L.C. AND A B2 TO THE SENIOR SECURED BANK LOAN
New York, 12-18-97 -- Moody's Investors Service today assigned a Caa2 rating to Production Resource Group's proposed $100 million guaranteed senior subordinated notes due 2007, and a B2 rating to its existing $100 million guaranteed senior secured revolving credit facility due 2002. The rating outlook is stable.
The ratings reflect high financial leverage, EBITDA that is concentrated in capital intensive equipment rental, a balance sheet weakened by distributions (including a portion of tax-related distributions) to shareholders, integration risks associated with a number of acquisitions over the last two years, the need to reinvest significant capital each year, a highly competitive market, corporate management expertise concentrated in the CEO and uncertain value of assets. Furthermore, while initially only a small portion of the bank facility is available, it is expected to be used for acquisitions which subordinates the notes to a large secured bank loan. Finally, the use of proceeds includes $10 million for distributions to shareholders which, when added to the $9.3 million (a portion of which was distributed to pay taxes) already distributed, or contemplated to be, in conjunction with the spinoff of real estate in 1997, results in a negative net worth of $7.3 million. Positive considerations include a leading market position, strong relationships with the long term theatrical and other corporate customers, high margins on rental revenues, the expectation that acquisitions will bring additional cash flow, diverse type and geography of cash flows and a long term key CEO and divisional management.
The B2 rating on the revolving credit facility reflects the security by all assets and stock and reflects the benefits of this collateral package. The stable outlook notes the expectation that gross financial leverage won't improve for at least another two years as EBITDA grows to reduce leverage and and provide greater coverage of interest.
Proceeds from the note offering will be used to repay $68 million in bank credit financing incurred the acquisitions of Bash Lighting and Design Dynamics and capital expenditures, $9 million to fund the acquisition of Pro-Mix and $10 million to make a distribution to stockholders. Additional cash for acquisitions or working capital of approximately $10 million will remain from proceeds.
The company consist of three businesses: the scenic group which includes the installation and long term rental of a patented motion control system, Stage Command, and scenic design and fabrication for the live entertainment and themed markets; the events services group which fabricates trade show exhibits and provides project management for corporate events; and the lighting and audio group which sells, rents and installs equipment for the live entertainment, corporate event and themed entertainment markets. The company provides skilled services with the rental of equipment as a significant component.
The company's revenues are diversified among its niches with scenic and lighting and audio revenues being the largest segment; the bulk of the company's EBITDA, however, is concentrated in the rental of equipment. These rental agreements provide a steady, recurrent source of revenue and cash flow, but also require a continuing investment in capital. It is Moody's view that the business of equipment rentals requires the continual reinvestment of cash to support the revenue stream and larger capital expenditures than projected may be necessary. The long term leases for motion control equipment primarily consist of special effects for Broadway shows which is mostly paid for upfront and then rented from the company for the run of the show. The short term rentals are for lighting and audio needs of a large number of entertainment and meeting customers (ca. 2500 individual accounts). These three businesses comprised 85% of total pre-overhead contribution for the first nine months of 1997, but only 50% of revenues.
The lower margin businesses are primarily large, high profile projects which carry a degree of concentration in revenues. The large, themed entertainment projects with a series of different customers, however, are accounted for and billed on a percentage of completion basis providing progress payments periodically through the life of the project.
The other company segments consist of corporate event services and scenery which includes large themed entertainment projects with margins significantly lower than the rental based revenues. These are viewed by the company as research and development as many of them are high profile and employ new techniques or concepts.
The company has seen growth both internally and by acquisition with Bash Lighting, Design Dynamics and Thoughtful Designs being acquired in 1997 and Cinema Services in Las Vegas and Vanco Lighting in Orlando acquired in 1996. It is expected that there will continue to be acquisitions and, while cash from this issuance is available and the bank facility is in existence, the company will need to comply with restrictive bank loan covenants and seek lenders approval under certain circumstances. The growth internally and from acquisitions in the last two years has tripled revenue since 1995, spread the company out geographically and focused cash flow increasingly on short term equipment rentals.
The use of acquisitions as the significant driver of growth intensifies the need for strong integration controls to absorb the systems and to realize cross-marketing opportunities. The company's traditional sales growth has primarily been driven by recommendations and relationships and it is in the process of rolling out an integrated marketing plan under a new head of marketing.
At December 31, 1997, on a pro forma basis for the completion of this issue and all uses of proceeds, total debt was 4.4 times trailing 12-months' EBITDA and adjusted EBITDA will cover proforma interest expense 2.4 times. EBITDA less capital expenditures provides thin coverage at 1.1 times. Pro forma stockholders' equity is negative $7.3 million and total debt is $101 million. It is estimated that initially only $15 million of the bank credit facility will be available in accordance with the availability formulas. Projections show reduction in leverage as revenues grow, but Moody's is concerned about the vulnerability of revenues to general business conditions.
The bank loan agreement permits total debt to rise to 4.75 times EBITDA (on a maintenance basis), while the bond indenture allows debt incurrence if interest coverage is greater than 2.0 times. The credit facility is guaranteed by all operating subsidiaries and is secured by substantially all assets and stock of the company and its operating subsidiaries and has upstream and downstream guarantees.
The stable outlook reflects the need for the company to achieve increased revenues and integrate acquisitions smoothly. It also incorporates the expectation that the company will find acquisitions which will be funded by the currently unused bank credit facility. With the bank facility undrawn, there are no significant debt maturities for ten years which gives the company flexibility to consider other acquisitions.
The company has adopted a tax-driven organizational structure under which Production Resources holds most of the assets as a limited liability corporation. Distributions to the members to pay taxes are permitted to be paid.
Production Resources Group L.L.C. is an integrator, fabricator and supplier of products and services to the live entertainment, corporate event and themed entertainment markets. It is headquartered in New Windsor, New York.
No Related Data.
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