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Rating Action:

MOODY'S DOWNGRADES SENIOR UNSECURED DEBT RATINGS OF RANK TO Ba2 (FROM Baa3); OUTLOOK IS NEGATIVE

06 Mar 2006
MOODY'S DOWNGRADES SENIOR UNSECURED DEBT RATINGS OF RANK TO Ba2 (FROM Baa3); OUTLOOK IS NEGATIVE

Approximately USD 115 Million of Outstanding Long-Term Debt Affected

London, 06 March 2006 -- Moody's Investors Service today assigned a Ba2 corporate family rating to The Rank Group Plc ("Rank") and concurrently downgraded the senior unsecured long-term debt ratings of Rank Group Finance Plc (guaranteed by The Rank Group Plc) to Ba2 (from Baa3). The rating action is prompted by Rank's announcement that it will distribute GBP 200 million to shareholders, following the completion of the Deluxe Film's disposal as well as by the group's weak operating performance in 2005. The downgrade reflects Moody's expectation that Rank's more limited business scope and less diversified business profile combined with its increased leverage will result in a considerably weakened financial profile. The rating action concludes a review initiated on 7 December 2005.

The Ba2 ratings factor in Rank's decision to adopt a dividend policy more in line with its reduced profit generation and also assume that Rank's leverage will not deteriorate above 4x Net Debt/EBITDA (within 5x on a Net Adj. Debt /EBITDAR basis) in 2006 and that these ratios will show measurable improvement from 2007 onwards with commensurate improvements in retained and free cash flow generation. However, given (i) the fact that Deluxe Media Services (DMS) remains unsold and therefore remains a drain on overall profits and cash flows (ii) the challenges for Rank to reach its targeted level of revenue growth and operating margins on a sustainable basis and (iii) a degree of strategic uncertainty with regard to potential financial buyer interest in Rank, the rating outlook is negative.

The sale of Rank's Deluxe Film unit to DX III Holdings Corporation, a wholly owned indirect subsidiary of MacAndrews & Forbes Holdings Inc for a total consideration of USD 750 million (approximately GBP 430 million) has removed a significant source of revenue and profit diversification from the group. Moody's understands that the warranties and guarantees included in the final sale agreement are customary for this type of transaction and the ratings do not factor in any remaining material obligations from the agreement. On the upside, the rating agency acknowledges Rank's more streamlined and focused operations following the Deluxe film sale, recognising the company's leading brands and strong market positions in the UK gaming market and the business' proven stability. In addition, the combination with Hard Rock offers some strategic value, including ongoing opportunities for brand extension. While the main strands of Rank's future strategy are well defined, the imminent arrival of a new chief executive adds a degree of strategic uncertainty, the rating agency said.

Going forward, Rank will have to prove that it can deliver significantly improved operating performance in its core UK gaming franchise and that it can build on Hard Rock's solid 2005 performance. While new UK gambling regulation has brought improvements for Rank's operating environment such as the abolition of the 24 hours rule for casino membership, relaxation of advertising restrictions and increases in gambling machine allowances these improvements have remained somewhat below previous expectations. Moody's further notes that competitive intensity in the sector might well increase from 2008 onwards when new casino licences will start creating commercial opportunities for other operators. In addition, in the short term Rank's bingo business in particular will have to cope with the introduction of smoking bans in Spain (January 2006), Scotland (from March 2006) and in the rest of the UK (from 2007).

Given the above challenges, the rating leaves no leeway for further share buy-backs and very limited room for acquisitions. On the other hand, evidence of sound operating progress over the next twelve months coupled with a satisfactory resolution of the DMS sale could help to stabilize the outlook. A near-term upgrade is highly unlikely, but sustained revenue and profit growth with an Adj. RCF to Adj. net debt ratio above 12% and an Adj. Net Debt to EBITDAR ratio moving towards 3.5x on a sustainable basis could result in upgrade pressure on the ratings over the medium term

Moody's regards Rank's liquidity as adequate. The group does not face any material debt maturities until early 2008 when USD 100 million of Yankee bond falls due and headroom under its GBP 400 million revolving credit should be sufficient to address near-term operating needs. Nevertheless Moody's notes Rank's relatively high reliance on its revolving credit facility which is expected to be drawn progressively as the company implements its share buy-back programme. Rank's credit facilities, comprised of the revolver (due 2011) and a GBP 250 million term loan facility, are subject to customary financial covenant tests. Rank's funding is complemented by its GBP 168 million (face value) convertible loan and by the rated Yankee bonds (USD 115 million). All material debt elements in the company's capital structure are currently unsecured, ranking pari- passu with other unsecured payments obligations of the group. While the rated Yankee bonds do not have change of control protection the negative pledge language is not restricted to public debt instruments.

Rank's results for 2005 were negatively impacted by a weak performance of the gaming division resulting in lower operating profit before exceptional items by 6.3% to GBP 127.5 million despite overall revenue increasing 2.9% to GBP 810.3 million from GBP 787.6 million after restatement for Blue Square. Although gaming reported revenue growth of 2.1% to GBP 529.8 million compared to 2004, division's operating profits were hit by operating cost increases as well as low sportsbook margins and increased marketing investment at Blue Square. Sportsbook margins at Blue Square continue to be depressed by the impact of online betting exchanges, which are able to offer attractive odds thanks to a more favourable tax treatment and reduced operating costs. On a more positive note, Hard Rock improved profits before exceptional items by 24.7% to GBP 34.8 million, aided by higher contribution from hotels and gaming interests. Moody's also notes that despite improved performance at the Hard Rock division and some expectation of further improvements in its gaming division, overall revenue visibility remains limited. Deluxe Film and Deluxe Media Service were treated as discontinued operations. Deluxe Film operating profits increased by 9.9% to GBP 65.7 million due largely to increases in profit in Creative Services while Deluxe Media Service generated operating losses before exceptional items for GBP 16.4 million.

Ratings downgraded to Ba2 are:

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

USD 100m Guaranteed notes due 2008

USD 24.8m Guaranteed notes due 2018

The Rank Group Plc's senior unsecured issuer rating was downgraded to Ba2 and will subsequently be withdrawn and a Ba2 corporate family rating was assigned to The Rank Group Plc.

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

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Christian Rauch
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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