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Rating Action:

Moody's assigns a B1 rating to Summit Entertainment's new facility

30 Jan 2012

Approximately $500 million of debt rated

New York, January 30, 2012 -- Moody's Investors Service assigned a B1 Corporate Family Rating ("CFR") and B2 Probability of Default Rating ("PDR") to Summit Entertainment LLC ("Summit"), and a B1 rating to its new $500 million 4.5 year senior secured term loan. The company was acquired by Lions Gate, Entertainment Inc. ("Lionsgate") (B2 CFR on review for upgrade) on January 13, 2012, as a result of which it became a wholly owned subsidiary of Lionsgate. Summit's new term loan was funded at the close of the transaction and is non-recourse to Lionsgate (exclusive of Summit) and is secured only by the assets of Summit and its subsidiaries. Proceeds from the new term loan were used to repay the company's previous $550 million term loan (which had just over $500 million of principal outstanding), and its previous $200 million revolving facility (undrawn at the time of acquisition) was eliminated. The ratings on Summit's previous credit facilities were withdrawn as a result of the transaction. The rating outlook is stable.


..Issuer: Summit Entertainment, LLC

....Corporate Family Rating, Assigned B1

....Probability of Default Rating, Assigned B2

....Senior Secured Bank Credit Facility, Assigned B1, LGD 3-40%

Outlook Actions:

..Issuer: Summit Entertainment, LLC

....Outlook, Assigned Stable


Summit's B1 Corporate Family Rating (CFR) reflects the inherent high risk associated with new film production and its modest library of films, which is a depreciating asset. This is partially mitigated by the success of the Twilight franchise and significant expected near term cash flows from the last two sequels in the series (Breaking Dawn 1 released in November 2011 and Breaking Dawn 2 expected to release in November 2012). The rating reflects Moody's expectation that the company will apply a majority if not all of its cash flows towards debt reduction, supported by strong credit protections and mandatory cash sweeps in its term loan agreement, and we expect the company to pay down all of its debt by the end of its 4.5 year term. The company is highly dependent on cash flows from the Breaking Dawn films to be able to fully pay down the term loan, however, there is more certainty on the performance of its last Twilight film given the strong box office performance of the franchise's first four films. Based on our projections, the performance of the company's unreleased films has a marginal impact on its ability to fully repay the term loan, although if profitable these films could provide extra cushion.

The terms of the credit agreement are important to the rating, since they limit leakage of cash flow generation and facilitate rapid debt reduction, reducing refinancing risk in our view. The key component is a 75% sweep of net cash flows from Breaking Dawn 1 & 2, which ensures that a majority of up-front, predictable revenues go towards debt reduction. The terms protect these significant visible cash flows from the more risky cash flows of its other unreleased films, as a result of structured asset pools which do not allow for the cash flows to be netted between different pools. Other provisions include a 50% excess cash flow sweep from all other released and unreleased films, mandatory amortization of $55 million per year (although cash flow sweep payments will be applied pro-rata towards remaining amortization payments) and a mandatory prepayment requirement which would require excess cash balances above specific thresholds to be used for debt pay down (which would capture some of the residual 25% cash from Breaking Dawn films and 50% from other films). We note that the agreement allows for some restricted payments upon 75% amortization of the loan, which increases risk to the residual debt beyond fiscal 2014. Moody's notes that expectation of significant debt pay down by the end of fiscal 2014 (March 31, 2014) and minimizing refinance risk is key to the B1 rating.

Production risk is mitigated as the remaining costs for Summit's upcoming films (except for Breaking Dawn 2) will be advanced by Lionsgate, which will bear the risk of any film losses on its unreleased films. Summit would also benefit from any net profits from new films beyond its committed slate, and the downside risk of losses would again be borne by Lionsgate since the credit agreement does not allow Summit to advance cash generated by its released and 13 unreleased films towards any further new production. Since the cash flow sweep from Breaking Dawn and its released films will remain protected from any losses on its unreleased films, this reduces the impact of production risk on the company's ability to fully repay debt and minimizes refinance risk.

The rating also considers the company's dependence on cash flows from Breaking Dawn as a source of liquidity. As a result of Summit's acquisition by Lionsgate, most of its cash balance was contributed towards the purchase and its $200 million revolving facility was eliminated. However, this is mitigated to a large extent by the terms under which it was acquired. Since Lionsgate will fund all upcoming films' (other than Breaking Dawn 2) production costs and prints and ads, and most of its released films are cash flow positive, we do not anticipate the company will need any additional sources of funding. In addition, its servicing agreement with Lionsgate will eliminate significant borrower overhead against film cash flows, in lieu of a variable fee which will be tied to film performance and will be capped. We believe that since this was a strategic acquisition by Lionsgate, as opposed to a private equity transaction, it is more likely to receive additional support from its parent, if needed.

The stable outlook reflects a balance between the expectation of strong cash flow from the Twilight franchise and consequent debt reduction by about 75% by fiscal 2014, and an increase in risk over time with greater dependence on new film production which may result in refinancing risk or sale of the library to repay the expected relatively small amount of residual debt towards the end of its term. In Moody's view, Lionsgate may decide to repay the small remaining portion of of outstanding debt if the unreleased film pool doesn't generate profits. A rating downgrade could occur if there is credit deterioration at Lionsgate which affects it liquidity and ability to fund Summits remaining production and distribution costs, as well as Summit's revenue and EBITDA are significantly below expectations and the company is not on the projected pace for debt reduction resulting in cumulative debt amortization of materially less than 75% by the end of fiscal 2014. A rating upgrade is unlikely in the near term based on the company's revenue concentration and low visibility on the revenues in later years which bear higher risk. However, if the company pays down debt at a more rapid pace due to better than expected performance of its upcoming films, resulting in more than 85% debt amortization by the end of fiscal 2014, upward pressure on the rating could occur.

Summit'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; (iii) 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 Summit's core industry and believes Summit'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 for a copy of these methodologies.

Summit Entertainment LLC, a wholly owned subsidiary of Lions Gate Entertainment Inc, is engaged in the production and distribution of motion picture films for theatrical, home entertainment, television and ancillary markets., and has a small library of films produced since 2007 which include the Twilight franchise of 5 films (one of which is yet to be released).


Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on

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

Moody's assigns a B1 rating to Summit Entertainment's new facility
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