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Global Credit Research - 12 May 2010
$172.5 million loan facility rated.
New York, May 12, 2010 -- Moody's Investors Service (Moody's) has assigned a definitive rating of
Ba1 to a Term Loan Facility (the TLF) being extended to Cinedigm Digital
Funding I, LLC (Borrower), an indirect subsidiary of Cinedigm
Digital Cinema Corp. (Cinedigm). This transaction is a securitization
of cash flows consisting primarily of virtual print fees (VPFs) payable
by motion picture distributors. Proceeds from the TLF will be used
to refinance debt incurred in connection with the acquisition and installation
of approximately 3,700 digital cinema projectors and related equipment
in theaters as part of Cinedigm's 'Phase I' deployment of digital cinema
projectors. Cinedigm will act as the manager of the transaction
and in that capacity has the obligation to perform various administrative
and managerial duties. However the TLF itself is an obligation
of the Borrower and is not guaranteed by Cinedigm.
The complete rating action is as follows:
$172,500,000 Term Loan Facility, rated Ba1
Cinedigm, founded in 2000, provides services and software
solutions to distributors and exhibitors of digital content, primarily
movie theater exhibitors. These services include technology and
software services, digital content delivery, and financing,
administrative and deployment services for digital cinema projection systems.
As part of its Phase I deployment, approximately 3,700 cinema
screens in the US owned by a specific group of exhibitors (the Exhibitor
Group), were upgraded from 35mm projectors to digital projection
systems. The exhibitors participating in Phase I include Carmike
Cinemas, Inc. (B2), Rave Motion Pictures (NR),
and Marquee Cinemas, Inc. (Marquee Holdings, Inc.
- B2) among others. Carmike theater screens represent about
58% of the pool while no other single exhibitor exceeds 13%.
The $172,500,000 TLF is secured by the rights to VPFs
payable by film distributors for all digital prints exhibited at the theaters
where the digital cinema projectors are installed. By converting
exhibition to digital, film distributors can cut costs considerably
since the cost of distribution is much lower for digital prints than for
35mm prints. In addition, fees from the exhibition of non-film
content, such as special concerts or live sporting events,
are an additional, albeit likely minor, source of income securing
The ratings of the TLF is mainly derived from an assessment of the strength
of the film distributors, which are affiliates of the major Hollywood
studios, and to a lesser extent the Exhibitor Group where the systems
are installed, as well as the experience and expertise of Cinedigm
as Manager. The main source of revenue to the transaction is the
VPFs, which are incurred as studios release films. The ratings
are based on a review of past release frequency and the commitment of
the studios to release digital films (such as Avatar). The main
risk to this transaction is the risk that the major motion picture studios
slow their production and release of large budget films which are widely
distributed. This is measured as the turnover rate, or films
per screen per year. Large budget films are typically released
over thousands of screens and run for a number of weeks until moving to
DVD or pay-per-view. Over time, the habits
of film studios could change in ways that could reduce average turnover,
for instance distributing over fewer screens or extending film runs at
the box office for longer periods of time (both subsequently reducing
the number of digital prints). Another significant risk is the
viability and to a lesser extent, the financial health, of
the exhibitors. As seen in the 1990's, theater circuits may
close theaters during bankruptcies. As the exhibitors are comprised
of below investment grade companies, theater closure continues to
be a possibility and poses a risk to this transaction. On the other
hand, the alignment of all parties' interests in digital conversion
is a significant strength for the transaction. The cost savings
to film distributors is considerable; the flexibility to change programming
and offer alternative content is appealing to the exhibitors; and
movie goers enjoy capabilities, such as 3D, enabled by digital
conversion. Finally, Cinedigm, not rated by Moody's,
as servicer is committed to digital cinema as shown by the reliance of
its other business lines on the success of their Phase I deployment.
The principal rating methodology used in rating this transaction is summarized
further below. Other methodologies and factors that may have been
considered in the process of rating this issue can also be found in the
Rating Methodologies sub-directory on the Moody's website.
V SCORE AND PARAMETER SENSITIVITY
V Score -The overall V Score for this transaction is Medium/High.
This indicates average to above average structure complexity and uncertainty
about critical assumptions. The Medium/High overall score for this
transaction is driven by a variety of factors. While historic theater
booking data is available and performance has been consistent, the
TLF relies on payments of VPF's using digital equipment for which there
is limited data. Also, this transaction is unique with limited
issuance in this asset class; thus, there is minimal historical
securitization data to review. As for the complexity and market
value sensitivity section, the score is Medium for this transaction
as the transaction and analytical complexity is comparable to other securitizations
while the market value sensitivity is minimal.
Parameter Sensitivities - For this exercise, we analyzed
scenarios stressing the key model input assumption to determine the potential
model-indicated ratings impact. The key model input for
the TLF is the screen turnover rate which is measured as the number of
VPF's per screen per year. The case which was the primary basis
for the rating assumed a uniform distribution with the range of 65%
to 95% leading to a midpoint at 80% from a base of 13.75x
(see below in the principal rating methodology). Additional cases
reducing the screen turnover uniform distribution range in 3% increments
from the base for each scenario leading to the midpoints at 77%
(10.6x), 74% (10.2x) and 71% (9.8x)
of the base were then simulated. Using such assumptions,
the Ba1 rating for the loans in the TLF might change based purely on model
results measuring the expected loss to: Ba3 at a midpoint screen
turnover rate of 10.6x, B2 at a midpoint screen turnover
rate of 10.2x, and B3 at a midpoint screen turnover rate
PRINCIPAL RATING METHODOLOGY
Moody's approach to rating this transaction relies primarily on analysis
of major motion picture distributors ability to pay VPFs, the risk
of theater closures by the Exhibitor Group, and the digital projection
equipment and technology. Monte Carlo simulations are run to analyze
the debt structure using key input parameters plus qualitative judgments
are also used to determine the final rating.
Major Film Distributors. For an initial release of a 35mm film,
a motion picture studio must create hundreds (or thousands) of physical
35mm reels and distribute them to each cinema. This initial "print"
cost will now be replaced by a VPF which will allow for digital transmission
via satellite or delivery of hard-disk to the cinema. For
this new digital delivery, the print cost is substantially reduced
for film distributors. To help finance this conversion to digital,
many of the major motion picture studios have agreements to pay a declining
VPF for a fixed number of years (after which the VPF is $0).
Furthermore, the studios are committed to release films in digital
format while the exhibitors are required to play them digitally if the
screens are available. Other distributors not under contract may
be charged a higher VPF. A VPF is generated each time a film is
released and booked to be played on a screen, similar to the cost
of physical print which would incur a one-time cost when created.
For example, if a movie scheduled for release to 200 digital screens
domestically for the opening weekend, 200 VPF's would be generated.
Then to generate more VPF's, new films must be released while the
previous films move on to the post-box office phase. This
measure is the screen turnover rate which is the number of films played
per screen per year. General data suggests that the turnover for
all screens can be from 12x to 14x on average (that is, 12 to 14
different films per screen per year). This is a difficult factor
to predict and simulation is run with a wide ranging distribution for
values based on the factors mentioned above. Also, examining
trends in the movie industry is important to predict the screen turnover.
Studios have been moving to shorten the theatrical cycle, while
widening the initial box office release, moving more quickly to
television and DVD which would increase screen turnover. Additionally,
the number of films released has increased since 2000 which would also
imply shorter theater run-time. However, economic
conditions have required film studios to reduce the number of film projects
recently so this also must be considered. For simulation,
a base screen turnover of 13.75x was assumed, and simulation
was run using a screen turnover distributed uniformly from 65%
to 95% of the base (that is, about 8.9x to 13.1x).
Exhibitor Group. The Exhibitor Group consists of about 17 companies
but was modeled as consisting of Carmike, Rave, and Marquee
with the rest modeled as one additional exposure. Current exhibitor
ratings notched down one notch were used for simulating exhibitor default.
Where no rating was available, B3 was assumed. Upon a simulation
default, a uniformly distributed theater closure rate upon default
of 15% to 35% was applied. This estimate was established
using history of theater industry bankruptcies in the 1990's. No
sale or redeployment was assumed in these cases. Additionally,
non-film content was assumed to be triangularly distributed with
a [Min, Mode, Max] of [$5, $25,
$50] per screen per quarter, and equipment salvage value
(applied at maturity for screens in service) was assumed to be $2,500
per system. Additional stressed scenarios were run which assumed
no non-film content and zero equipment salvage value.
Equipment and Technology. Each installation includes a digital
projector, player, computer server, and software.
The digital projection system must meet the Digital Cinema Initiative
(DCI) specification. This DCI specification was established by
a consortium of movie studios to develop a standard for digital cinema
file format, data transmission, projector resolution,
among many other details. Once a system meets this specification,
the exhibitor is under contract to ensure proper maintenance. In
our view there is little exposure to technology risk once a system meets
this spec and begins generating VPFs. Cinedigm has a substantial
stake in the transaction (both financially and through its related business
lines and continuing Phase II deployment), the underlying technological
specifications represent an industry standard achieved after years of
development, and the Exhibitors are getting the equipment without
paying for it whereas any alternative would involve cost.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's assigns definitive rating to Cinedigm Digital Funding I, LLC digital cinema equipment securitization
Structured Finance Group
Moody's Investors Service
No Related Data.
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