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11 Mar 2010
Approximately $445 Million in loan interests affected.
New York, March 11, 2010 -- Moody's Investors Service (Moody's) has assigned a definitive
rating of Baa2 to a senior credit facility (the SCF), composed of
two loans, being extended to Kasima, LLC (Borrower),
an indirect subsidiary of Digital Cinema Implementation Partners,
LLC (DCIP) . This transaction is a securitization of cash flows
consisting primarily of virtual print fees (VPFs) payable by motion picture
distributors. Drawings under the SCF, in conjunction with
proceeds from subordinate financing and equity, will be used to
finance the costs associated with acquiring and installing digital cinema
projectors and related equipment in theaters owned by DCIP's three
joint venture owners.
The complete rating action is as follows:
$335,000,000 Senior Delayed-Draw Term Loan,
$110,000,000 Senior Revolver Loan, rated Baa2
DCIP was formed in February 2007 by AMC Entertainment Inc. (B1,
stable outlook), Cinemark Inc. (B1, positive outlook),
and Regal Entertainment Group (Ba3, negative outlook) (collectively
the Exhibitor Group) to upgrade their 35mm projectors in the U.
S. and Canada to digital projection systems. The Exhibitor
Group's theaters collectively represent over 50% of the box
office receipts for U.S. and Canada. Advances under
the $445,000,000 SCF will be 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. Additional minor sources of income
securing the SCF and available to repay advances include rental payment
from the Exhibitor Group for each installed digital projection system,
which will be owned by and leased from Kasima, as well as fees from
the exhibition of non-film content, such as special concerts
or live sporting events.
The ratings of the loans are mainly derived from an assessment of the
strength of the film distributors, which are affiliates of the major
Hollywood studios, and the Exhibitor Group. The main driver
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 released. Large budget films are typically released
over thousands of screens while running for a number of weeks until moving
to DVD or pay-per-view. Over time, the habits
of film studios may change, for instance releasing over fewer screens
or running films in the box office for extended periods of time (both
subsequently reducing the number of digital prints). Another major
risk is the financial health of the Exhibitor Group. As seen in
the 1990's, theater circuits may close theaters during bankruptcies.
As the Exhibitor Group is comprised of below investment grade companies,
theater closure continues to be a possibility and poses a risk to this
transaction. However, the alignment of all parties' interests
in digital conversion is a significant strength that counters these risks.
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 the digital experience.
Moody's feels this profile of risks and benefits is consistent with
the ratings of the loans. Finally, the role of unrated DCIP
as servicer is supported by a joint and several guarantee from each Exhibitor
Group member of the performance by DCIP of its various obligations under
the transaction documents.
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 V Score for this transaction is Medium/High or Average/Above
Average. The V Score indicates "Average/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, this SCF relies on payments of VPF's using digital
equipment. The rate at which VPF's are generated (for which
there is very limited data) may differ from historical 35mm theater booking
data. Also, this transaction is unique and the first of its
type and thus, there is no 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
this SCF is the screen turnover rate which is measured as the number of
VPF's per screen per year. The stress case which was the
primary basis for the rating assumed a uniform distribution with an average
of 11.75x for the term of the transaction with additional cases
reducing the average screen turnover rate for each scenario to 10.5x,
9.75x, and 9.0x. Using such assumptions,
the Baa2 ratings for the loans in the SCF might change based purely on
model results to Ba2 at an average screen turnover rate of 10.5x,
B1 at an average screen turnover rate of 9.75x, and B3 at
an average screen turnover rate of 9.0x.
PRINCIPAL RATING METHODOLOGY
Moody's approach to rating this transaction relies on analysis of
major motion picture distributors and the film industry to generate an
estimate for VPFs, 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 fixed
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 16x on average (that is, 12 to
16 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,
screen turnover was distributed uniformly from 9.75x to 14.75
for the first three years and 10.5x to 15x thereafter.
Exhibitor Group. Using history of theater industry bankruptcies
in the 1990's, an estimate of theater closures was simulated
for the Exhibitor Group. Upon closure, different scenarios
were run to estimate the amount of screens that would stop generating
VPF's. No sale or redeployment was assumed in these cases.
The current public ratings were notched down one rating level to determine
probability of default and a uniformly distributed theater closure rate
upon default of 5% to 25% was used for the simulation.
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 spec 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. There is little
exposure to technology risk once a system meets this spec and begins generating
VPF's. Technology risk was not an input to our Monte Carlo
simulation analysis. The Exhibitor Group has substantial equity
in the transaction and the underlying technological specifications represent
an industry standard acheived after years of development. As such
we view the transaction as relatively insensitive to technology risk.
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.
Structured Finance Group
Moody's Investors Service
Moody's assigns definitive rating to Kasima, LLC securitized digital cinema equipment financing transaction
Senior Vice President
Structured Finance Group
Moody's Investors Service
No Related Data.
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