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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.
David G. Staples
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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