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09 Feb 2011
Approximately $625 million of debt affected
New York, February 09, 2011 -- Moody's Investors Service confirmed its ratings for Deluxe Entertainment
Services Group, Inc. ("Deluxe" or the company), including
the B1 Corporate Family Rating (CFR) and B1 Probability of Default Rating
(PDR), along with all other rated debt instruments as outlined below.
The rating outlook was revised to negative, however.
These actions conclude Moody's review for possible downgrade of the company's
ratings, as initiated on September 2, 2010 and subsequent
to which the company was awarded the Universal Studios film processing
contract (announced on October 20, 2010) and acquired the creative
services and media services business of Ascent Media (closed on December
31,2010). In Moody's view, the Ascent Media acquisition
improves Deluxe's position in the creative services space and diversifies
its customer base into the TV and short-form commercial markets.
The acquisition also decreases the company's dependence on the declining
physical film distribution and processing business, which is additive
to the new Universal Studios film processing contract and should moderate
revenue declines from the segment over the next two years.
Confirmations (and LGD point estimate changes, as noted):
..Issuer: Deluxe Entertainment Services Group,
Inc.
Corporate Family Rating -- Confirmed B1
....Probability of Default Rating --
Confirmed B1
....Senior Secured 1st Lien Credit Facility
-- Confirmed Ba3 (to LGD3, 36% from LGD3, 39%)
....Senior Secured 2nd Lien Credit Facility
-- Confirmed B3 (to LGD5, 82% from LGD5, 84%)
Withdrawals:
..Issuer: Deluxe Toronto Ltd.
....Senior Secured 1st Lien Credit Facility
-- Withdrew Ba3 (LGD3, 39%)
Outlook: Negative
RATINGS RATIONALE
Deluxe's B1 CFR reflects moderately high proforma debt-to-EBITDA
leverage of approximately 3.5x (including Moody's standard
adjustments) in consideration of an expected ongoing decline in core processing
and distribution of physical film footage due to digital substitution.
The expected broad-based roll-out of digital projectors
is fueled in part with funding raised in the first half of 2010 by digital
projector integrators who are closely aligned with major studios as well
as theatre exhibitors. The rating is supported by the company's
leading positions in the motion picture and television film processing,
distribution and creative services industries. In addition to its
recent joint venture with EchoStar to provide digital film delivery,
Deluxe continues to invest in its creative services operations to transition
the business mix away from its reliance on traditional physical 35mm film
distribution. The creative services segment has grown over the
past several years and, with the recent acquisition of Ascent Media's
competing businesses, is expected to contribute approximately 50%
of EBITDA for 2011. Creative services are more vulnerable than
processing and distribution due to cyclical swings in studio and consumer
video spending and are impacted by technological advances as well as competition
from fragmented providers of post-production services. The
rating accommodates predictable erosion of physical film processing and
distribution revenue with more stable performance from existing and recently
acquired creative services businesses given added diversification into
TV programs and short-form commercial segments. Ratings
are further supported by requirements under the existing credit agreement
including $60 million of annual term loan B amortization and restrictive
financial maintenance covenants.
The negative outlook reflects Moody's view that the decline in demand
for film print processing and distribution in the U.S. and
Europe could accelerate, and is further compounded by uncertainties
related to the company's ability to grow the creative services business
and assimilate the recently acquired operations of Ascent Media.
In the absence of the positive bias associated with the Universal contract
win and Ascent-related business diversification, Moody's
notes that the company's ratings would have been lowered as originally
contemplated by the September 2010-initiated review.
Ratings could be still be downgraded if operating results fall short of
management's plan due to acceleration in the roll-out of
digital projectors, poor integration of creative services acquisitions
and/or competitive pressure resulting in weakened liquidity or deterioration
in cash flow such that debt-to-EBITDA ratios exceed 3.75x
(including Moody's standard adjustments). Downward rating pressure
could also occur if we do not expect the capital structure to be sufficiently
conservative in the face of debt-financed acquisitions and/or cash
distributions to equity holders. A change in the outlook to stable
could be considered if revenues and EBITDA from creative services stabilize
and the capital structure remains sufficiently conservative to mitigate
the decline in demand for physical film processing and distribution and
the risks associated with the company's acquisition strategy.
Please see the credit opinion on www.moodys.com for additional
information on Deluxe's ratings.
The last rating action was on December 1, 2009 when Moody's withdrew
ratings on Deluxe's proposed $600 million senior secured
note issuance following termination of the transaction.
Deluxe'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; (ii) 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 Deluxe's
core industry and believes Deluxe's ratings are comparable to those of
other issuers with similar credit risk. Additional research can
be found in the Deluxe Credit Opinion on www.moodys.com.
Deluxe Entertainment Services Group Inc. ("Deluxe"), headquartered
in Los Angeles, CA, is a worldwide supplier of film processing
and distribution (50% of pro forma FY2010 revenue) as well as creative
services (50% of pro forma revenue) to the major producers and
distributors of motion pictures and television programs. Deluxe
is an indirect wholly-owned subsidiary of MacAndrews & Forbes
Holdings Inc. Revenue was approximately $982 million for
the LTM period ended September 30, 2010.
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.
REGULATORY DISCLOSURES
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 maintaining
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.
New York
Carl Salas
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Confirms Deluxe Entertainment's B1 CFR; Outlook Revised to Negative
No Related Data.
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