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Rating Action:

Moody's affirms Hit's B3 CFR / Caa1 PDR; outlook still negative

Global Credit Research - 08 Jun 2010

Approximately $560 million of rated debt commitments affected

Toronto, June 08, 2010 -- Moody's Investors Service (Moody's) affirmed Hit Entertainment Inc.'s (Hit) B3 corporate family rating (CFR) and Caa1 probability of default rating (PDR) subsequent to a recent amendment and extension of the company's first lien bank credit facility. We assess the transaction as having offsetting features that make it appropriate to maintain the existing ratings and outlook. The extension and financial covenant amendment provide Hit with more time to address weak leverage and coverage in advance of refinancing its debts. However, the company's underlying business and financial performance is not affected, and debt repayment capability is not aided by the resulting cash leakage stemming from higher interest rates and significant amendment fees. The transaction also results in debt reduction; this caused a modest adjustment to the loss given default assessment applicable to the first lien credit facility (see below).

Ratings and Outlook Actions:

Issuer: Hit Entertainment, Inc.

Corporate Family Rating, unchanged/affirmed at B3

Probability of Default Rating, unchanged/affirmed at Caa1

Senior Secured First Lien Bank Credit Facility, unchanged/affirmed at B1 with the LGD assessment revised to LGD2, 18% from LGD2, 19%

Senior Secured Second Lien Loan, unchanged/affirmed at Caa2 (LGD4, 68%)

Outlook actions:

Outlook unchanged at negative

The primarily negative ratings influence continues to be the company's weak leverage and coverage and the inability to amortize indebtedness. The primary positive influence is the underlying value of the company's pre-school entertainment properties, in particular, Thomas the Tank Engine (Thomas). Hit's recent operating results have been weak, and stem primarily from limited top-line growth that is expected to remain muted over the rating horizon due to continuing weak general economic conditions and limited opportunities for geographic expansion. Results are also heavily reliant on the Thomas property. There are risks that ongoing attempts to re-orient operations and properties will not increase cash flow or alleviate revenue concentration. Absent EBITDA expansion, weak free cash generation will persist and the company will likely have to rely on underlying asset value to refinance of its debts. This may prompt asset sales activity as a debt repayment alternative. Absence near-term EBITDA expansion, ratings may come under renewed pressure later this year.

For additional commentary, please refer to the associated Credit Opinion (available on Moodys.com within a day of this press release).

Moody's most recent rating action concerning Hit was taken on September 21, 2009, at which time Moody's downgraded the company's CFR and PDR to B3 and Caa1, respectively, both from B2.

Hit's ratings were assigned by evaluating factors Moody's believes are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others within its industry, ii) the capital structure and financial risk of the company, iii) the projected performance of the company over the near to intermediate term, and iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside of Hit's core industry and Hit's ratings are believed to be comparable to those of other issuers of similar credit risk. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

With offices in London, England and New York, HIT is involved in the creation, production and international exploitation (via television, video, publishing, licensing and live events) of properties (including Bob the Builder, Thomas the Tank Engine, and Barney) catering to pre-school children.

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Toronto
William Wolfe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Moody's affirms Hit's B3 CFR / Caa1 PDR; outlook still negative
No Related Data.
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