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Announcement:

Moody's affirms Lionsgate's B1 CFR and upgrades its liquidity rating to SGL-2 following the increase in its revolver borrowing limit and credit consolidation of Summit

18 Oct 2012

New York, October 18, 2012 -- Moody's Investors Service affirmed Lions Gate Entertainment, Inc.'s (Lionsgate)' B1 Corporate Family Rating (CFR) and B1 Probability of Default Rating (PDR) following the amendment to increase its revolver borrowing limit under its 2nd lien notes indenture, and the subsequent consolidation of Summit Entertainment, LLC (Summit) into its credit. The B1 rating on its senior secured 2nd lien notes remains unchanged, and loss given default point estimates were updated to reflect the change in capital structure. Moody's upgraded Lionsgate's Speculative Grade Liquidity rating to SGL-2 from SGL-3, as a result of the transaction's improvement on Lionsgate's liquidity profile .

The following is a summary of today's actions:

Upgrades:

..Lions Gate Entertainment Inc.

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

LGD Updates:

....Senior Secured 2nd Lien Notes due 2016, Changed to LGD4 - 51% from LGD3 - 42% (no change to B1 rating)

The amendment to the senior secured 2nd lien notes allows Lionsgate to borrow up to $650 million under its $800 million revolving credit facility, increased from the previous $340 million borrowing limitation calculated in the company's notes indenture. Following the amendment, Lionsgate terminated and prepaid the $299.2 million outstanding term loan at Summit (B1 CFR), which had thus far been an unrestricted subsidiary whose assets were not pledged towards debt at Lionsgate and whose debt did not have recourse to Lionsgate's other cash flow and assets. The company also arranged for Summit and certain of its affiliates to become guarantors under Lionsgate's 2nd lien notes indenture and credit agreement. In our view, the termination and prepayment of the Summit loan and the subsequent guarantees that were put into place for Summit to directly support Lionsgate debt, effectively unify the credit. As a result, we have withdrawn all ratings for Summit.

Moody's notes that the Summit term loan had excess cash flow sweep provisions that provided for disciplined repayment of debt using the significant proceeds expected from the second Breaking Dawn film in the Twilight series (slated for release in November 2012) as well other new film and library cash flows at Summit. "While Lionsgate's revolver has no cash flow sweep provisions to ensure such disciplined debt reduction, we expect the company to be reasonably self-disciplined and pay down any incremental revolver debt using cash proceeds from the Summit assets in a similar fashion as was expected under the Summit term loan," stated Neil Begley, a Moody's Senior Vice President. In addition, the absence of the cash sweep will provide Lionsgate with more financial flexibility, given its significant expected near term production costs. We anticipate that the consolidation of Summit may result in cost savings associated with a simplified overhead structure, and since the Summit term loan had a higher interest rate than Lionsgate's credit facility, Lionsgate will benefit from lower interest expense which we estimate to be over $20 million in reduced cumulative interest expense. In our view, any substantial increase in revolver debt would be mitigated by its creditors getting full recourse to Summit's cash flows consistent with the priority of claims on the Lionsgate assets, primarily from the Twilight franchise, and therefore its B1 CFR is not impacted by the transaction.

On a standalone basis (excluding Summit), we expected Lionsgate to have moderately negative cash flow in the near term driven by the high investment in film and TV production, and turn cash flow positive only beginning fiscal 2014 upon the release of sequels under its Hunger Games franchise. The credit consolidation of Summit will improve the company's near term cash flow and have the effect of smoothing out its metrics, since most of Summit's cash flow is expected to come in over the next 24 months upon the release of its last Twilight film. On a consolidated basis, we expect the company to pay down debt, sustain leverage under 5.0x and generate positive free cash flow in fiscal 2013. We upgraded the company's liquidity rating to SGL-2 from SGL-3, as we expect the inclusion of Summit's cash flows to improve Lionsgate's cash flow generation to positive over the next 12 months. We also expect the borrowing availability under its revolver to increase as it applies cash flows from Summit to reduce its revolver debt, enhancing its access to external liquidity as it now has a $650 million revolver borrowing limit instead of the previous $340 million limit.

The B1 rating on Lionsgate's senior secured 2nd lien notes is unchanged by the amendment, since the rating already accommodated for anticipated changes in the company's capital structure that may have resulted in higher revolver borrowings and therefore increased the amount of senior debt in the capital structure.

RATINGS RATIONALE

The B1 Corporate Family Rating (CFR) reflects the inherent high risk and typical low margins associated with the film production business and the mixed performance of Lions Gate's film slate in recent years, which has led to frequent losses, often negative free cash flow and high leverage. This is partially mitigated by the company's significant asset value as well as the success of the first film in the Hunger Games franchise and significant expected cash flows from the probable success of the remaining three sequels in the series, which are slated to be released through fiscal 2016. We expect operating performance to improve as a result of the company's cost reduction initiatives as well as increasing contribution (to EBITDA) from TV program syndication revenues and the cable network businesses, which include TVGuide Network and EPIX. The company has improved financial flexibility after the consolidation of Summit Entertainment, which generates significant positive cash flows driven by its Twilight film franchise (with the last film slated for release in November 2012). We expect the company to sustain leverage under 5.0x and generate positive free cash flow in fiscal 2013, as heavy investments in film and TV production are expected to be offset by significant cash flows from at least one major sequel release per year.

Despite the higher visibility for profits and cash flows provided by the Hunger Games and Twilight franchises, the company's ratings are constrained by the potential for reinvestment of its profits in underperforming films and the absence of cash flow sweep requirements which enforce discipline for debt pay down, given the volatile nature of its businesses and high absolute levels of debt. The rating is supported by the company's good liquidity profile, characterized by positive free cash flow generation and ample borrowing capacity under its $800 million revolver.

The stable outlook reflects Moody's expectation that the company will generate positive cash flow over the forward rating horizon as returns begin to flow from the significant television and film investments. The outlook also reflects our expectation that management will use a portion of future free cash flows towards debt repayment and will take steps to strengthen its balance sheet and improve and sustain its credit metrics.

A rating upgrade is unlikely in the near term given the prospective nature of the current rating and low visibility on the revenues in later years, especially beyond the completion of the Hunger Games franchise. However, ratings could be upgraded if the company has more consistent film performance across its slate and demonstrates the ability to develop other successful film franchises, or the company diversifies its operations further and thereby reducing the impact from theatrical film performance contribution and volatility, such that it can generate sustainable positive free cash flow, and materially reduce absolute debt and sustain debt-to-EBITDA leverage of under 3.0x.

The company's ratings could be downgraded if operating performance falls short of current expectations and the company regresses to consistent negative free cash flow which in turn, would likely pressure its liquidity position without access to capital markets. Additionally, downward pressure might occur if the company engages in acquisitions that adversely impact cash flow, leverage and/or liquidity. A change in our expectation of the company's ability and commitment towards debt reduction could also lead to a downgrade.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

Lionsgate'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 Lionsgate's core industry and believes Lionsgate's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Lionsgate Entertainment Corp. ("Lionsgate"), domiciled in British Columbia, Canada (headquartered in Santa Monica, CA), is a motion picture studio with a diversified presence in the production and distribution of motion pictures, television programming, home entertainment, video-on-demand and digitally delivered content.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Lionsgate's B1 CFR and upgrades its liquidity rating to SGL-2 following the increase in its revolver borrowing limit and credit consolidation of Summit
No Related Data.
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