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Rating Action:

MOODY'S DOWNGRADES RANK'S SR. DEBT RATINGS TO Baa3 (FROM Baa2); OUTLOOK IS STABLE

19 Jun 2003
MOODY'S DOWNGRADES RANK'S SR. DEBT RATINGS TO Baa3 (FROM Baa2); OUTLOOK IS STABLE

Approximately GBP 550 Million of Debt Securities Affected.

London, 19 June 2003 -- Moody's Investors Service today downgraded the long-term ratings of The Rank Group Plc to Baa3 (from Baa2) and assigned a stable outlook. The rating action is based on Moody's expectation that continued outflows from up-front contract payments at Rank's Deluxe unit, along with the weaker outlook for Deluxe's media services business as the decline of the higher-margin VHS duplication business continues, as well as continued pressures in the Hard Rock division, could well delay a meaningful improvement in Rank's cash flow-based debt protection measures into 2004. The rating action concludes a review initiated on May 19, 2003.

A stable outlook does not incorporate any material debt-financed acquisitions and assumes that Rank will be able to improve or maintain operating margins in the 15% range and that total indebtedness and cash flow generation post working capital should recover to 2001 levels in 2004. We also note that Rank's GBP250 Million syndicated credit facility, the company's main short term funding instrument, falls due in the first quarter of 2004 and would expect the company to enter into a replacement facility at least six months before the current facility matures.

While Moody's recognises Deluxe's (48% of Rank's 2002 turnover) need to secure contracts periodically by paying the film studios cash up-front and recovering this money over the length of the contract, this does add significant volatility of Rank's cash flow after working capital changes and with that to the company's debt position. In 2002 Deluxe made net cash advances of GBP 135 million that contributed to the year's increase in debt to GBP 733 million (including preferred shares) versus prior year's GBP 596 million. These outflows, which secured 79% of Deluxe's film duplication volume to 2005, caused retained cash flow (after tax and dividends but before capex) to turn negative ( GBP -40 million vs. GBP 118 million in 2001). In Moody's opinion, 2003 might well see additional outflows, if Deluxe, in line with stated company ambitions is successful in securing new contracts in DVD replication. This would delay more positive cash flow developments on the back of recouping advances to studios into 2004.

Moody's recognises Hard Rock's (17% of 2002 turnover) management's efforts at reducing the business' cost base over the past few years, while moving towards a business model more focused on licensing revenues by trying to explore brand-extensions beyond pure restaurant operations, and attempting to reduce tourist activity dependency both by opening cafes in non-tourist locations and attracting more local customers in the tourist dependent venues. While these efforts are showing some positive effects, Moody's remains concerned about the growth prospects of the cafe business and about Rank's ability to maintain Hard Rock's brand strength as merchandise sales falter. On the upside, Rank's gaming business (32% of 2002 turnover) has been consistently improving operating margins over the past five years and is well-positioned to benefit from expected UK gaming deregulation, albeit that the timing for enacting changes remains unclear. In Bingo, Rank's Mecca has focused more on profitability rather than growth in admissions and sales. This is demonstrated by its 2002 year-end results, where spend per head increased by 8%, offsetting the 5% decline in admission. This business although mature should, in Moody's view, continue to be a stable cash flow generator for Rank. Meanwhile, Grosvenor Casinos has clearly benefited from some early relaxation of gaming legislation that has boosted casino attendance, while the successful launch of new games and relocations continue to drive growth in operating profits. Rank's gaming division should further benefit from cross selling opportunities with its recent acquisition of the leading internet and telephone business, Blue Square, for GBP 65 million.

Rank recently improved its maturity profile by securing USD 538 million in private placements with varying maturities. Moody's believes that Rank might well use part of the proceeds from the private placement to exercise its right to redeem its convertible preferred shares of GPB 226.9 million, which become redeemable from June 30 this year. These preferred shares, which have been out-of-the money for years, have always been included as debt in our leverage analysis and replacing it with straight debt with tax deductible interest payments makes sense from a balance sheet perspective. The remaining 2003 short-term debt repayments and outflows from deferred payment obligations are limited and we believe that smaller acquisitions, operational outflows, if any and a possible redemption of the convertible loan stock issued in connection with the Blue Square acquisition can all be met from existing resources. In addition to a timely refinancing of its credit facility, we would expect the company to address its main 2004 maturity, the USD 200 million Yankee bond falling due in November, at an early stage.

Ratings downgraded are as follows:

The Rank Group Plc.

Long-term Issuer Rating to Baa3 (from Baa2)

Preferred Stock to Ba2 (from Ba1)

Rank America Inc. (guaranteed by The Rank Group Plc.)

Senior Unsecured to Baa3 (from Baa2)

Rank Group Finance (guaranteed by The Rank Group Plc.)

Senior Unsecured to Baa3 (from Baa2)

The Rank Group Plc is a leisure and entertainment company based in London, England.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
33 1 53 30 10 20

London
Christian Rauch
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
44 20 7772 5454

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