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Rating Action:

MOODY'S CHANGES OUTLOOK FOR DEBT OF LODGENET ENTERTAINMENT TO NEGATIVE

16 Nov 2001
MOODY'S CHANGES OUTLOOK FOR DEBT OF LODGENET ENTERTAINMENT TO NEGATIVE New York, November 16, 2001 -- Moody's Investors Service changed the rating outlook for the debt of LodgeNet Entertainment (LodgeNet) to negative from stable. The company's debt ratings are as follows:

$150 million of 10-1/4% senior unsecured notes due 2006 - B1
$75 million senior secured revolver due 2006 - Ba3
$150 million senior secured term loan due 2006 - Ba3
Senior Unsecured Issuer Rating - B1
Senior Implied Rating - Ba3

The outlook revision reflects the dramatic slowdown in hotel occupancy rates following the September 11th terrorist attacks, combined with Moody's expectation that current economic weakness may be more prolonged than previously anticipated, and that business and leisure travel will remain depressed well into next year, which would likely have a negative impact on LodgeNet's business operations.

While the company's properties have reportedly seen a partial recovery from the 25%-30% decrease in occupancy levels immediately following September 11th, management's guidance of an estimated 3.5%-6.5% decrease in occupancy rates for 2002 may be overly optimistic in Moody's estimation. If the current economic slowdown were to become more severe and/or protracted, as is expected by Moody's, a considerably sharper drop in occupancy rates could reasonably be expected. Combined with the prospect of decreased occupancy (and corresponding buy) rates is the prospect of further decreases in LodgeNet room revenue receipts as customers curtail discretionary spending. While Moody's acknowledges that revenue per room has held up relatively well to date, it is unclear that this trend will not also be adversely affected in the face of a continued downturn. Ratings would likely be lowered if Moody's believed that further erosion of cash flow was likely to occur beyond those levels already identified on a revised basis by management.

As company revenues are driven almost entirely by occupancy and buy rates, both of which are expected to remain weak over the ensuing rating horizon, there will likely be pressure on operating results, potential margin erosion, and a correspondingly reduced liquidity and diminished credit profile more broadly. Under such a scenario, we are not convinced that capital expenditures could be scaled back by a sufficient amount to permit positive free cash flow generation, and hence are concerned about liquidity needs under the envisioned slowdown scenario going forward, particularly if it is more severe than expected. Morevover, if the company were to bump up against its financial maintenance covenants and thereby be denied access to currently undrawn revolver availability, our concerns would be heightened and further rating adjustments might be warranted at that time. Alternatively, if hotel occupancy and LodgeNet service buy rates stabilize and/or improve, and room-take economics improve through greater revenue generation and/or cost-cutting initiatives as recently outlined by management, a return to a more stable rating outlook would be appropriate.

LodgeNet Entertainment provides cable, video-on-demand and video game entertainment services to the lodging industry. The company maintains its headquarters in Sioux Falls, South Dakota.
No Related Data.
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