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Rating Action:

Moody's assigns B1 rating to National Amusements' notes

24 Nov 2010

$390 million of senior secured notes rated with stable outlook

Toronto, November 24, 2010 -- Moody's Investors Service (Moody's) assigned a B1 corporate family rating (CFR) and a B2 probability of default rating (PDR) to NAI Entertainment Holdings LLC (NAI), a wholly-owned subsidiary of National Amusements Inc. (National Amusements, a private media holding company owned by the Redstone family). As part of the rating action, Moody's assigned B1 ratings to NAI's new senior secured notes, which, among other things, refinance pre-existing debts at National Amusements. NAI was also assigned an SGL-2 speculative grade liquidity rating (indicating good liquidity). The rating outlook is stable. NAI holds nearly all of National Amusements' cinema assets plus a portion of its equity interests in CBS Corp. (CBS) and Viacom Inc. (Viacom).

The following summarizes NAI's ratings and today's rating actions:

Assignments:

..Issuer: NAI Entertainment Holdings LLC

....Corporate Family Rating, Assigned B1

....Probability of Default Rating, Assigned B2

....Senior Secured Regular Bond/Debenture, Assigned B1 (LGD3, 32%)

....Speculative Grade Liquidity Rating, Assigned SGL-2

RATINGS RATIONALE

On one hand, NAI is a small cinema operator with weak financial performance, little free cash flow, and a complex legal entity and management structure. However, NAI is also an investment company with -- in proportion to its debt -- considerable asset value stemming from holdings in CBS and Viacom; there is also the associated incoming dividend. The B1 CFR and B2 PDR reflect the relatively high default risk resulting from NAI's weak cash flow generating capability, while also reflecting outsized recovery prospects in the event of a default. The CBS and Viacom holdings also augment the security package which includes NAI's cinema operations and real estate holdings. The ratings also reflect NAI's very small aggregate scale and relatively poor operating margins. As well, a majority of the company's EBITDA stream is derived from foreign operations and the periodic repatriation of foreign cash flow provides a level of complexity that augments risk. So too does the "carve-out" of NAI from National Amusements; NAI is an artificial entity whose assets are legally but perhaps not operationally separable and whose management is provided under a services contract that also addresses National Amusements. Cinema operation is characterized by relatively stable demand and the business model is recession-tested. While we have concerns about competition from alternative exhibition media, declining attendance and limited price elasticity, these dynamics allow ratings for industry participants to tolerate somewhat more financial leverage than would otherwise be the case. We anticipate NAI will have solid liquidity arrangements comprised of reasonable levels of operating cash flow, a substantial committed revolving credit facility (access to which is not expected to be limited by financial covenant compliance issues), and the ability to monetize components of the substantial collateral package.

Rating Outlook

The stable rating outlook is predicated on our expectation that the company will allocate de-levering potential towards discretionary growth capital expenditures and that, as a result, leverage will remain relatively constant in the mid-to-high 6x range (on a fully adjusted basis) over the rating horizon.

What Could Change the Rating - Up

A rating upgrade is not contemplated within the rating horizon. However, among other things, Moody's would consider an upgrade or positive outlook if FCF/TD was expected to be maintained around 5% and TD/EBITDA was expected to be sustained below 6x (in both cases, incorporating Moody's standard adjustments). A rating upgrade would also have to involve assurance of solid liquidity arrangements and positive industry fundamentals.

What Could Change the Rating - Down

Moody's would consider a ratings downgrade if free cash flow generation was expected to be nominal or negative for a prolonged period and/or if TD/EBITDA was expected to be in excess of 7x, once again, on a sustained basis, or if FCF, excluding incoming dividends and the like, were minimal or negative. Any of a debt-financed acquisition (of more than nominal size), adverse liquidity developments, or deteriorating industry fundamentals could also cause downwards rating pressure. As well, should the estimated after-tax asset value provided by the security package erode below (approximately) 1.5x, the rating would also be subject to downwards rating pressure.

Company Profile

NAI Entertainment Holdings LLC (NAI) is a wholly-owned subsidiary of National Amusements Inc. (National Amusements, a Norwood, Massachusetts-based private media holding company owned by the Redstone family). NAI holds nearly all of National Amusements' cinema assets plus a minority of its equity interests in CBS Corp. (CBS) and Viacom Inc. (Viacom).

NAI's ratings were assigned by evaluating factors we believe 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 NAI's's core industry and NAI's ratings are believed to be comparable to those of other issuers of similar credit risk.

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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.

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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.

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

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

Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada

Moody's assigns B1 rating to National Amusements' notes
No Related Data.
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