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Rating Action:

Moody's affirms Entertainment One's Ba3 CFR and assigns B1 rating to the new notes due 2026; stable outlook

13 Jun 2019

London, 13 June 2019 -- Moody's Investors Service ("Moody's") has today affirmed Entertainment One Ltd.'s (Entertainment One or the company) Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR). Concurrently, Moody's has assigned a B1 instrument rating to the new GBP425 million senior secured notes due 2026 issued by the company. The outlook is stable.

The rating action follows the announcement by Entertainment One on 12 June 2018 of its intention to issue GBP425 million senior secured notes due 2026 to (1) refinance the company's existing GBP355 million senior secured notes due 2022 (unaffected), (2) pay the GBP12 million early redemption costs on the existing notes, (3) repay the outstanding GBP52 million term loan, and (4) pay transaction costs. Moody's will withdraw the rating on the existing GBP355 million senior secured notes due 2022 following their repayment.

RATINGS RATIONALE

"Whilst the transaction is relatively leverage neutral, Moody's positively views the fact that the refinancing of the existing senior secured notes due 2022 by the new senior secured notes due 2026 will improve the company's maturity profile", says Sebastien Cieniewski, Moody's lead analyst for Entertainment One.

A full list of affected ratings can be found at the end of this press release.

Entertainment One's Ba3 CFR is supported by (1) the company's diversified content investment portfolio which limits the risks associated with the success of individual content releases, (2) the strong relationships with production companies, cinemas, retail distributors and media platforms, that allow the company to monetize content rights across all media windows, (3) the projected growth of demand for content driven by broadcast networks and digital platforms, including Netflix, Inc. (Ba3 stable) and Amazon Prime Video, a subsidiary of Amazon.com, Inc. (A3, positive), and (4) the company's adequate liquidity position and predictable financial policy with a target of maintaining net leverage (as reported by the company) at between 1.0x and 2.0x over the medium-term.

However, Entertainment One's rating remains constrained by (1) the limited scale of the business relative to major US and international studios which are often part of large and diversified corporate groups, (2) the potential volatility in earnings and credit metrics based on the quality of the film release slate and television content and significant seasonality with a concentration of earnings in the second half of the fiscal year, and (3) and the lack of de-leveraging over the medium-term projected by Moody's driven by sustained investment in production to be partly funded with incremental debt and bolt-on acquisitions.

In the fiscal year (FY) ended 31 March 2019, Entertainment One reported a 9% decline in revenue to GBP941 million. The decline was driven by lower revenues in the Film, Television & Music division (-13% compared to prior FY) resulting from fewer film releases, home entertainment market decline and scripted television slate composition partly offset by a strong growth in music revenue. On the other hand, the Family & Brands division continued experiencing a strong growth -- 28% increase compared to prior FY -- driven by the success of Peppa Pig and PJ Masks among others. Despite the revenue decline, Entertainment One increased its underlying EBITDA (as reported by the company) by 21% in FY 2019 compared to prior FY to GBP197.6 million supported by its two divisions. In particular, the EBITDA increase in the Film, Television & Music division was driven by the improved profitability, increased income from royalties from television library participations, increased music revenue and operating cost savings of around GBP5 million.

Thanks to the earnings growth, Entertainment One experienced an improvement in adjusted gross leverage (as adjusted by Moody's mainly for production financing, operating leases, share-based payments, and one-off items) to 3.6x as of 31 March 2019 (pro forma for the acquisition of Audio Networks) from 4.0x in prior year. Pro forma for the refinancing transaction, adjusted gross leverage was slightly higher at 3.7x of the end of FY 2019. Moody's does not forecast any significant de-leveraging over the next 2 years and expects leverage to remain at around 4.0x based on the rating agency's expectation of sustained investment in production to be partly funded with debt and track record of bolt-on acquisitions.

Moody's considers that Entertainment One has an adequate liquidity position. Liquidity is supported by GBP129.8 million of cash on balance sheet (or GBP74 million excluding cash held by production subsidiaries) and GBP156.8 million availability under the GBP200 million equivalent super-senior revolving credit facility (RCF) due December 2023.

Entertainment One's probability of default rating of Ba3-PD is at the same level as the corporate family rating, reflecting the recovery rate of 50% typically expected by us for a capital structure that consists of a mix of bank credit facilities and bond debt. The company's GBP200 million equivalent super senior RCF (due December 2023) has been ranked highest in priority of claims, reflecting the company's priority of payment at the time of enforcement. The new GBP425 million senior secured notes due 2026 issued by Entertainment One are ranked second in priority of claims and rated B1, one notch below the CFR, reflecting the sizeable RCF ranking above.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook is based on Moody's expectation that the company will maintain strong operating momentum with credit metrics remaining comfortably positioned at the Ba3 rating and that the company will return to positive revenue growth from FY2020 driven by a return to growth of its Film, Television & Music division.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure may arise if (1) Entertainment One maintains a highly diversified content investment portfolio, (2) gross leverage (as adjusted by Moody's) decreases to below 3.0x on a sustainable basis, (3) the company generates a positive free cash flow (after capital spending and dividends) while increasing the value of its content library, and (4) the company maintains a strong liquidity position.

Negative rating pressure may develop if (1) Entertainment One experiences a marked deterioration in operating performance, (2) gross leverage (as adjusted by Moody's) is sustained at well above 4.0x due to debt-financed acquisitions or weak operating results, or (3) the company generates negative free cash flow leading to a deterioration of its liquidity position.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Entertainment One Ltd.

....Senior Secured Regular Bond/Debenture, Assigned B1

Affirmations:

..Issuer: Entertainment One Ltd.

.... Corporate Family Rating, Affirmed Ba3

.... Probability of Default Rating, Affirmed Ba3-PD

Outlook Actions:

..Issuer: Entertainment One Ltd.

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

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.

COMPANY PROFILE

Entertainment One is a global independent studio that specializes in the development, acquisition, production, financing, distribution and sale of entertainment content. The company's library of rights includes around 80,000 hours of film and television content and around 40,000 music tracks. The company also owns 85% of the intellectual property in Peppa Pig as well as exclusive worldwide distribution rights. The content library is independently valued at USD2,000 million (as of 31 March 2018). The company is listed on the London Stock Exchange and is a member of the FTSE 250 Index. The company's largest shareholder, Canada Pension Plan Investment Board, holds 17.5% of the outstanding shares.

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.

Sebastien Cieniewski
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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