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Rating Action:

Moody's affirms Cirque du Soleil's B3 CFR following acquisition; outlook is stable

06 Feb 2019

New York, February 06, 2019 -- Moody's Investors Service ("Moody's") affirmed CDS U.S. Intermediate Holdings, Inc.'s (Cirque du Soleil) B3 corporate family rating (CFR) following the company's announcement raising $120 million in senior unsecured debt to fund an acquisition of The Works Entertainment, a live entertainment company specializing in magic and illusion shows and for future capital expenditures and acquisitions. Cirque du Soleil has drawn $60 million for the acquisition and expansion projects, with the remaining $60 million available to be drawn for one year starting in June 2019. Moody's has also affirmed the company's B2 first-lien secured instrument rating, Caa2 second-lien secured instrument rating and B3-PD probability of default (PD) rating. The outlook remains stable. Moody's does not rate newly raised senior unsecured debt.

A summary of today's action follows:

Affirmations:

..Issuer: CDS U.S. Intermediate Holdings, Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

....Gtd Senior Secured 1st lien Revolving Credit Facility due 2022, Affirmed B2 (LGD3)

....Senior Secured 1st lien Term Loan due 2022, Affirmed B2 (LGD3)

....Gtd Senior Secured 2nd lien Term Loan due 2023, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: CDS U.S. Intermediate Holdings, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

Cirque du Soleil's B3 corporate family rating ("CFR") and stable outlook reflect very high leverage of 8.3x pro-forma for $120 million increase in debt, due to a high level of discretionary borrowing, continued underperformance in several key areas previously targeted for growth as well as relative stagnation of its existing core performing arts business. While the acquisition of The Works Entertainment further diversifies the company's live show repertoire with shows like The Illusionists and Circus 1903, the relatively small size of EBITDA contribution, limited cost saving synergies as well as weakness in the acquired asset financial controls provides for immaterial improvement to EBITDA despite increased debt. The incremental $60 million of debt being raised will go towards new show development and potentially more acquisitions in the future. Though Cirque du Soleil continues to expand into new types of shows and experiences and invests for growth both organically and through acquisitions, we believe that the company's largely debt-funded expansion strategy could be unsustainable, resulting in financial strain on core operations and leaving minimal flexibility to address operating weaknesses when they arise. The company's financial policy that favors shareholders has increased credit risk, which together with the recent deterioration in performance has resulted in a weaker financial profile. We expect that prior investments in content will demonstrate stronger contribution to revenue and operating income in 2019, however, we note that the acquisition-driven and shareholder focused financial policy may prevent further de-levering even if the core operating performance meets our expectations. Cirque du Soleil's business model requires ongoing investments in new content, which has historically compressed free cash flow generation.

We expect Cirque du Soleil's performance to improve in 2019 due to several new shows opening, however, we anticipate that leverage will remain at or above 7x through the next 12 months. We expect the company to demonstrate low to mid-teens revenue and EBITDA growth in 2019 as some of the shows that were closed or are in transition will re-open in 2019. We expect Cirque du Soleil to generate slightly negative free cash flow after including the growth capital spending for its new shows. Moody's expects the company will maintain adequate liquidity.

The stable outlook reflects Moody's view that the company's core performing arts shows will remain stable, with expansion and diversification of portfolio gaining traction in 2019, while offset by continued exposure to operating risk from localized disruptions as well as continued competitive pressure from other providers of live entertainment. The company's shareholder friendly financial policy reduces the likelihood of further de-levering from improved operations.

A rating upgrade is unlikely. However, Moody's could upgrade ratings if Cirque du Soleil demonstrates improvement in its operating performance, reduces and sustains leverage at 5.5x (including Moody's adjustments) or lower and generates positive free cash flow. Ratings could be downgraded if operating performance deteriorates such that the company is unable to maintain leverage below 8x (including Moody's adjustments), additional debt-funded acquisitions occur, or there is a reduction in liquidity.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CDS U.S. Intermediate Holdings, Inc. is a provider of unique live acrobatic theatrical performances. The company currently operates 6 Cirque du Soleil resident shows, 6 Blue Man Group resident shows and 11 touring shows. For last twelve months ending September 30, 2018 the company's revenue was $832 million. The company's founder, Guy Laliberte, retains a 10% minority interest after a leveraged buyout in July of 2015. TPG Capital Group (55% share), Fosun Capital Group (25% share) and Caisse de depot et placement du Quebec (10% share) purchased 90% the company using the proceeds of the credit facilities plus approximately $630 million of cash equity contribution.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alina Khavulya
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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