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Global Credit Research - 24 Jan 2011
Ratings assigned to $195 million of debt
New York, January 24, 2011 -- Moody's Investors Service assigned a Caa1 Corporate Family Rating (CFR)
and a Caa1 Probability of Default Rating (PDR) for Encompass Digital Media,
Inc. ("Encompass"). Moody's also assigned B2 (LGD2
- 29%) ratings to the company's proposed $20
million first lien revolver due 2016 and $175 million first lien
term loan B due 2016, which fund the $120 million acquisition
of the content and distribution business of Ascent Media Inc. and
refinance existing debt. The rating outlook is stable.
The following ratings were assigned:
.. Issuer: Encompass Digital Media, Inc.
..... Corporate Family Rating:
..... Probability of Default Rating:
..... New first lien revolver due 2016
-- B2 (LGD2, 29%)
..... New first lien term loan B due
2016 -- B2 (LGD2, 29%)
The rating outlook is stable.
Encompass' Caa1 CFR broadly reflects high financial risk,
as evidenced by debt-to-EBITDA leverage of approximately
5.3x (including Moody's standard adjustments) and weak fixed
charge coverage of just over one time, and business risks associated
with being a provider of outsourced services. The majority of revenues
is generated from large content providers, including major cable
and broadcast networks, some of which provide most of their own,
in-house origination and transmission. Encompass provides
third-party origination and transmission for a portion of these
clients' needs. Customers are willing to outsource a portion
of their business to the extent Encompass provides competitive service
and/or technology, thereby allowing them to avoid capital spending
on infrastructure and/or technology upgrades to bring such business in-house.
A track record for providing the latest technology as well as dependable,
error free transmission and 24/7 service is critical. Ratings are
supported by multi-year contracts for more than 80% of revenues
combined with a $549 million backlog. Ratings are also supported
by the company's consistent relationships and high renewal rates.
Given maturation of cable channel proliferation, incremental demand
for third-party origination and distribution services is expected
to be driven by the outsourcing of upgraded content management in High
Definition/3D versus Standard Definition, proliferation of multiple
file formats, potential demand for disaster recovery services,
and development of TV broadcast central-casting. Revenues
are not advertising-based and dollars spent on origination and
distribution were sustained during the economic downturn. The Caa1
CFR reflects very limited free cash flow-to-total debt of
about 4%-to-5% as expected in the first year,
and accommodates the accrual of PIK interest on $95 million of
unrated second lien debt' held entirely by Tennenbaum Funds. The
total interest rate, including PIK and cash component, exceeds
the rate on the 1st lien debt and results in 1.2x EBITDA -
capex coverage of interest expense (including Moody's standard adjustments)
and roughly flat debt balances for the first 12 months. Encompass
has grown through acquisitions, and with the pending purchase of
Ascent Media's content distribution businesses revenues and EBITDA
are expected to double in size. Risks arise from the rapid growth
through acquisition; however, the pending transaction geographically
diversifies operations across the U.S. and establishes facilities
in the UK and Singapore. In addition, the combined entities
have a track record of capital spending in excess of the company's current
business plan. To the extent Encompass chooses to increase capital
spending above its plan, liquidity would notably be strained given
modest free cash flow and approximately $15 million of expected
The stable outlook reflects Moody's view that Debt-to EBITDA
will be sustained below 5.75x (including Moody's standard
adjustments) after the first 12 months as Encompass assimilates newly
acquired operations in the U.S. as well as the U.K.
and Singapore. The outlook also reflects expectations that the
company's multi-year backlog will continue to support predictable
revenue performance, liquidity will be adequate and EBITDA margins
will remain at current levels. Ratings could be downgraded if revenue
and/or EBITDA fall short of management's plan due to a decline in
contract renewals or an inability to develop new business resulting in
Debt-to-EBITDA ratios greater than 6.0x. A
decrease in backlog and/or erosion of margins resulting in weakened liquidity
and/or deterioration in EBITDA cushion relative to financial maintenance
covenant requirements would create downward rating pressure. An
upgrade could be considered if total debt-to-EBITDA is sustained
comfortably below 4.75x and first lien debt-to-EBITDA
is sustained comfortably below 2.0x, with free cash flow-to-debt
ratios greater than 7%.
The principal methodology used in determining instrument ratings was Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Encompass Digital Media, Inc. ("Encompass"), headquartered
in Los Angeles, CA, is a leading provider of outsourced network
origination and transmission services to broadcasters, cable channels
and other media companies. With the acquisition of satellite services
businesses of Crawford Communications in January 2010 and the pending
acquisition of the content distribution businesses of Ascent Media,
Encompass becomes a leading provider of outsourced services to the major
producers and distributors of motion pictures and television programs
in the U.S., Europe and Asia. Encompass is
owned primarily through an investment of an affiliate of Wasserstein &
Co. in addition to executive management and Tennenbaum Funds.
Through December 31, 2010, pro forma LTM revenue was approximately
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
and accurate data may not be available. Consequently, Moody's
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.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Assigns B2 Ratings to Encompass' New 1st Lien Credit Facilities; Caa1 CFR
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