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Global Credit Research - 19 Jan 2011
Approximately $800 million of debt affected
New York, January 19, 2011 -- Moody's Investors Service assigned a B1 Corporate Family Rating (CFR),
a B2 Probability-of-Default Rating (PDR) and a stable outlook
to Summit Entertainment, LLC ("Summit"). Additionally,
Moody's assigned a B1 rating to Summit's proposed $600 million,
7-year senior secured term loan and $200 million,
5-year senior secured revolving credit facility. Proceeds
from the new bank facility will be used to retire all existing indebtedness
(not including non-recourse debt), to pay transaction costs,
and for working capital needs and general corporate purposes including
funding new film production and distribution costs, and a special
distribution to its members. This is the first time Moody's has
assigned public ratings to Summit. The ratings are contingent upon
final terms of the credit agreement.
..Issuer: Summit Entertainment, LLC
.Corporate Family Rating -- B1
.Probability of Default Rating -- B2
.Senior Secured Revolving Credit Facility -- B1 (LGD
.Senior Secured Term Loan B -- B1 (LGD 3-37%)
The rating outlook is stable.
Summit's B1 CFR reflects the inherent high risk associated with
the film business and the company's dependence on new film production,
recognizing its modest library portfolio size. This is partially
mitigated by the success of the Twilight franchise and significant expected
near term cash flows from the last two sequels in the series over the
next three years. Moody's anticipates that over the next
seven years while the debt is outstanding, Summit will have good
credit metrics including moderate debt-to-EBITDA leverage
of around 2.75x on average, which is expected to start around
4.5x in 2011 and decline until 2013 through debt reduction resulting
from Twilight profits and strong excess cash flow sweep provisions in
the credit agreement. Nevertheless, we remain cautious about
the sustainability of strong credit metrics beyond 2013, given the
end of the Twilight franchise, uncertainty about a replacement franchise
and the volatile nature of the company's business which we believe
may well drive leverage again to above 4.0x in 2014 due to declining
EBITDA. Moody's notes that expectation of significant debt
pay down through 2013 and minimizing refinance risk is key to the B1 rating.
The B2 PDR is a notch lower than the company's CFR due to the company's
all bank capital structure with financial covenants resulting in a higher
probability of default and a higher expected family recovery rate of 65%.
The stable outlook reflects a balance between an expectation of strong
cash flow from the Twilight franchise and consequent debt reduction over
the next few years, and an increase in risk over time with greater
dependence on new film production which is not sequel-based.
We are forecasting debt-to-EBITDA leverage (on a cash basis)
to be around 4.5x in 2011, declining to under 2.0x
by 2013 and ramping up again to over 4.0x in 2014, with average
leverage around 2.75x over the term of the loan.
A rating upgrade is unlikely in the near term based on the company's
relatively short history, small portfolio size and low visibility
on the revenues in later years which bear higher risk. However,
if the company pays down debt at a more rapid pace due to better than
expected and consistent performance of new films and total leverage falls
and we believe can be sustained at under 2.0x by the end of 2014
along with credit protections remaining in place, upward pressure
on the rating could occur.
A rating downgrade could occur if revenue and EBITDA are significantly
below expectations and the company is not on the projected pace for debt
reduction resulting in total leverage which is materially higher than
our initial expectation of under 2.0x by the end of 2013 and a
2.75x average over the next seven years.
Moody's subscribers can find further details in the Credit Opinion for
Summit published on Moodys.com.
The principal methodology used in the instrument rating was Loss Given
Default for Speculative-Grade Non-Financial Companies in
the U.S., Canada and EMEA published in June 2009.
Summit's ratings were assigned by evaluating factors that Moody's
considers relevant to the credit profile of the issuer, such as
the company's (i) business risk and competitive position compared with
others within the industry; (iii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk. Moody's
compared these attributes against other issuers both within and outside
Summit's core industry and believes Summit's ratings are comparable
to those of other issuers with similar credit risk.
Summit Entertainment LLC, with its headquarters in Santa Monica,
California, is an independent film studio which started in April
2007 and is privately owned by management and a group of financial and
strategic investors. The company is engaged in the development,
financing, production and distribution of motion picture films for
theatrical, home entertainment, television and ancillary markets,
and its predecessor was a leading foreign distributor and co-producer
of films since 1993. Summit is best known for its production and
distribution of the very successful Twilight film franchise.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Assigns B1 rating to Summit Entertainment, LLC's CFR and New Bank Debt
250 Greenwich Street
New York, NY 10007
No Related Data.
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