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Rating Action:

MOODY'S UPGRADES PRODUCTION RESOURCE GROUP'S SR. SUB. NOTES TO Caa1 AND ITS SECURED CREDIT FACILTIY TO B1; OUTLOOK POSITIVE

08 Jul 1999
MOODY'S UPGRADES PRODUCTION RESOURCE GROUP'S SR. SUB. NOTES TO Caa1 AND ITS SECURED CREDIT FACILTIY TO B1; OUTLOOK POSITIVE Moody's Investors Service upgraded the rating of Production Resource Group's $100 million of 11.5% guaranteed senior subordinated notes, due 2008, to Caa1 from Caa2, and the rating on its $100 million of guaranteed senior secured revolving credit facility, maturing in 2002, to B1 from B2. The senior implied rating is B2 and the outlook is positive.

The upgrade reflects the progress that has been made in integrating the numerous acquisitions and implementing new information systems, the addition of cash equity, increased depth of management from the acquisitions and improvement in credit statistics.

The ratings continue to be constrained by high financial leverage, uncertain vulnerability to a downturn in the business cycle, a concentration of revenues in capital intensive equipment rental, a low level of equity capital, the ongoing integration of numerous acquisitions over the last two years, the expectation that there will continue to be debt financed acquisitions and the high degree of competition.

The rating of the senior secured bank loan reflects the benefit of the collateral package and the covenants. We expect this facility to increase by the end of the year to $150 million which will permit the possibility of increased secured debt ahead of the senior subordinated notes. The positive outlook incorporates the view that there could be an increase in the ratings over the next eighteen months if the integration of acquisitions continue to proceed smoothly and free cash flow continues to grow; however if the capital structure incorporates an increasing shift toward secured senior debt, the subordinated notes will be increasingly at a disadvantage.

The company's operations consist of four 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 groups which sell, rents and installs equipment for the live entertainment, corporate event and themed entertainment markets. The company's principal value-added is in skilled creative services with the rental of equipment as a significant component; the rental of equipment is a much more commodity-like business.

The company's revenues are diversified among its niches with lighting contributing 48% of revenues and 53% of pro forma 1998 EBITDA. These rental agreements provide a steady, recurrent source of revenue and cash flow, but also require a continued investment in capital. It is Moody's view that larger capital expenditures than projected may be necessary to support the rental inventory. The long term revenue from motion control equipment primarily consists 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).

The company has seen growth both internally and by acquisition with the acquisitions of Pro-Mix, Light and Sound Design Holdings, Production Arts, CBE Exhibits, Signal Perfection, Production Lighting Systems and Haas Multiples in 1998. In 1999, it has acquired A-1 Audio and Ancha Electronics. Moody's expects that there will continue to be acquisitions and, while cash from the new equity and the bank facility is available, the company will need to comply with restrictive bank loan and indenture covenants. The growth internally and from acquisitions in the last two years has quadrupled revenue since 1995, spread the company out geographically (including the UK) and focused cash flow increasingly on lighting revenues of which 50% is sales and 50% is rentals.

At December 31, 1998, on a pro forma basis for the completion of the Boston Ventures' transaction and all uses of proceeds, total debt will be 5.2 times trailing 12-months' EBITDA and pro forma for a full year of the acquisitions debt-to-EBITDA was 3.3 times. EBITDA less capital expenditures provides thin coverage at approximately 1.1 times (1.3 times netting out sale of equipment), even after eliminating one-time expenditures such as the building in Las Vegas. Pro forma member's equity is $8.3 million and total debt is $163 million. Projections show reduction in leverage as revenues grow, but Moody's is concerned about the high component of debt in the capital structure when the vulnerability of revenues to a downturn in the business cycle is uncertain.

The balance sheet has improved with new equity coming into the company. Boston Ventures is investing $65 million as convertible preferred stock (no dividend, no mandatory redemption, no fees) in the parent company, Production Resources Group, Inc., of which $55 million will then be paid out to founding owners. Boston Ventures will own 50% of the company with Jere Harris as the largest individual shareholder owning 32% in the remaining 50%. The transaction also included a new common B stock held by certain founding shareholders which carried an implied value of $80 million. These shares will convert over time into common A stock at current face value. Boston Ventures will elect two Directors and will have negative controls. An additional $5 million of equity is expected which will go out to founders also. Any future equity will remain in the company. The $10 million net cash equity, which will be downstreamed to the issuer as equity, will be used to pay down bank debt of which $65 million will then be outstanding.

The bank loan agreement permits total debt (adjusted for acquisitions) to be 4.25 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.

As part of the transaction, the company will form a c-corporation which will be the parent of the LLC. This new structure will permit the company to aggregate all subsidiaries for tax purposes and distributions to the LLC members for tax purposes will no longer be made.

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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