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Rating Action:

Moody's assigns B2 CFR to CDS U.S. Intermediate Holdings, Inc. (dba Cirque du Soleil); outlook stable

10 Jun 2015

Approximately $885 million of new debt and credit commitments rated

New York, June 10, 2015 -- Moody's Investors Service assigned to CDS U.S. Intermediate Holdings, Inc. (doing business as Cirque du Soleil) a first-time B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR). Concurrently, Moody's assigned a B1 rating to the proposed first-lien credit facilities, consisting of a $615 million senior secured term loan and $100 million senior secured revolving credit facility (RCF), and Caa1 rating to the $170 million second-lien senior secured term loan. The rating outlook is stable.

Proceeds from the new credit facilities plus approximately $630 million of new equity from funds managed by TPG Capital Group ("TPG"), Fosun Capital Group ("Fosun") and Caisse de depot et placement due Quebec ("Caisse") will be used to finance the leveraged buyout (LBO) of Cirque du Soleil. Guy Laliberte, the company's founder, will retain a 10% minority interest.

Moody's assigned the following ratings:

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

Corporate Family Rating -- B2

Probability of Default Rating -- B2-PD

$100 Million First-Lien Senior Secured Revolver due 2020 -- B1 (LGD3)

$615 Million First-Lien Senior Secured Term Loan due 2022 -- B1 (LGD3)

$170 Million Second-Lien Senior Secured Term Loan due 2023 -- Caa1 (LGD5)

Outlook: Stable

(*) CDS Canadian Intermediate Holdings, Inc. is a co-borrower of the facilities

The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as presented to Moody's.

RATINGS RATIONALE

Cirque du Soleil B2 CFR reflects the company's strong franchise of branded shows, its flexible operating model and its ability to continuously develop creative content and source talent in order to provide for a variation in its themed shows to maintain consumer appeal. The rating also incorporates the company's high pro-forma leverage of 5.4x of EBITDA (LTM as of March 2015, incorporating Moody's standard operating lease adjustments) pending the LBO, significant competition for discretionary consumer spending, as well as Cirque du Soleil's concentration in Las Vegas where it has a strong relationship with its event partner MGM Resorts International. The upfront investment and lead time to develop and launch new shows, uncertain consumer reception for newly launched shows, maturation of existing shows, and economic cycles create meaningful earnings and cash flow volatility. The Las Vegas exposure is partially mitigated by the geographic diversity contributed by the company's global touring business.

The company utilizes a partnership business model for its resident shows that minimizes capital expenditures and provides a variable operating expense structure such that many of the expenses are incurred on a per show or per box office sale basis. This creates greater flexibility than exists in the touring business to adjust costs in response to unplanned closures of live performances when consumer appeal does not meet the company's expectations. Because the venue for resident shows is established, the "time to performance" visibility is better for resident shows than for touring events. These are positive operating risk mitigants to Cirque du Soleil's show planning cycle.

Cirque du Soleil's mature single-product operating structure exposes it to events outside of its control, such as changes in consumer income and discretionary spending, travel disruptions, competition from other entertainment providers, natural disasters, and political upheavals. Such exposures as well as several misses on its resident shows have resulted in historical performance volatility, particularly when combined with relatively lumpy show development expenses. Pending purchase of the company by TPG, Cirque du Soleil is expected to modify its operating strategy, broadening its product offering through third-party IP partnerships, introduction of more affordable performances and further geographic expansion into new markets and venues. If well executed, this strategy may provide incremental operating income stability during periods of weaker economic conditions.

Moody's expects the company's near term revenue and operating profit to remain relatively flat, as existing shows mature and new shows are launched. Management intends to introduce additional profit generating initiatives over the near term and Moody's expects these initiatives to have positive contribution to EBITDA, offset by incremental new business development expenses. Moody's projects overall debt-to-EBITDA leverage and free cash flow to remain unchanged over the next 12-18 months from the pro forma levels following the LBO due to incremental investment and capital spending that will likely be needed to implement longer term plans for Cirque du Soleil. The B2 CFR incorporates the potential for shareholder friendly financial policies.

Moody's expects the company will maintain adequate liquidity with cash balances of at least $30 million, positive free cash flow, full access to a $100 million five-year revolving credit facility, and the absence of financial maintenance covenants in the credit facility except for a springing first lien net leverage ratio in the revolver that Moody's does not anticipate will be triggered over the next 12-18 months.

The stable rating outlook reflects Moody's view that the company will maintain its strong branded position within the entertainment segment, continuing to re-invent its live acrobatic performances. Moody's expects marginal revenue growth over the next 12-18 months largely through incremental ticket pricing increases and improvements in ancillary product sales. Moody's expects the EBITDA margins to remain in mid-teen percent, with 20% - 30% conversion of EBITDA into free cash flow, and debt-to-EBITDA remaining in a mid 5x range. Moody's projects positive free cash flow of roughly $30-40 million over the next 12 months (assuming no dividends), which will likely be used for broadening of the company's long-term product offerings.

An upgrade could occur if Cirque du Soleil exhibits revenue growth and successful implementation of product expansion leading to consistent and increasing free cash flow generation, sustained reduction in total debt to EBITDA leverage below 4.5x (Moody's adjusted) and free cash flow to adjusted debt of at least 10%. The company would also need to maintain a good liquidity position and exhibit prudent financial policies to be considered for an upgrade.

Ratings could be downgraded if debt-to-EBITDA leverage is sustained above 6.0x (Moody's adjusted), either through underperformance to plan or via aggressive financial policies. Cirque du Soleil's ratings could also be downgraded if broader macro-economic trends or changes in consumer appeal result in consistent underperformance of its core live acrobatic shows, its liquidity weakens, or the company's new incremental performance products fail to generate sufficient cash flow on a consistent basis.

Please see the credit opinion on www.moodys.com for additional information on CDS U.S. Intermediate Holdings, Inc. ratings.

The principal methodology used in this rating was Business and Consumer Service Industry published in December 2014. 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.

Cirque du Soleil is a provider of unique live acrobatic theatrical performances. The company currently has 9 resident shows (8 in Las Vegas and 1 in Orlando), and 9 touring shows. For FYE December 2014, the company's revenue was $845 million.

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 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 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 rating action, and whose ratings may change as a result of this 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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

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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: 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 assigns B2 CFR to CDS U.S. Intermediate Holdings, Inc. (dba Cirque du Soleil); outlook stable
No Related Data.
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