$220 Million securities affected
New York, March 31, 2011 -- Moody's Investors Service (Moody's) has assigned definitive ratings of
Baa1 (sf) to the new senior secured Incremental Term Loan extended to
Kasima, LLC (Borrower), an indirect subsidiary of Digital
Cinema Implementation Partners, LLC (DCIP). The loan is backed,
primarily, by the virtual print fees (VPFs) payable by motion picture
distributors each instance a movie is displayed in a digital format at
theater locations equipped with Kasima digital projection systems.
The complete rating action is as follows:
Issuer: Kasima, LLC
$220,000,000 Incremental Term Loan, rated Baa1
(sf)
RATINGS RATIONALE
The Incremental Term Loan is paid pari-passu with the existing
senior secured credit facility consisting of $110mm Senior Revolver
Loan and $335mm Senior Delayed Draw Term Loan. Proceeds
under the Incremental Term Loan will be used to prepay some of the existing
Senior Delayed Draw Term Loan.
The ratings of the Incremental Term Loan derived, primarily,
from an assessment of the strength of the film distributors, which
are affiliates of the major Hollywood studios, and the Exhibitor
Group comprised of AMC Entertainment Inc., Cinemark Holdings
Inc. and Regal Entertainment Group. The main driver of revenue
to the transaction is the VPFs, which are incurred as studios release
and book films at Exhibitor Group theater screens. The ratings
are based on a review of past release and booking frequency and the commitment
of the studios to release digital films. 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 less screens or running films in the box office for more
extended periods of time.
Another key 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 comprises 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 that counters the above 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.
Finally, while DCIP is a relatively new company with limited track
record, its performance and provision of administrative services
on behalf of Kasima is supported by a joint and several services guarantee
from each Exhibitor Group member.
The principal rating methodology used in rating the Loan is described
below. Other methodologies and factors that may have been considered
in the process of rating the loan can be found on www.moodys.com
in the Rating Methodologies sub-directory.
V-SCORE AND PARAMETER SENSITIVITIES
Moody's V Score. The V Score for this transaction is Medium-High.
The V Score indicates "Medium-High" uncertainty about critical
assumptions. Moody's V Scores provide a relative assessment of
the quality of available credit information and the potential variability
around the various inputs to a rating determination. The V Score
ranks transactions by the potential for significant rating changes owing
to uncertainty around the assumptions that underlie the ratings within
the categories of data quality, historical performance and the level
of disclosure for each of the asset class sector and the issuer,
transaction complexity, analytical modeling and the market value
risk, transaction governance, backup servicing, alignment
of interests and legal, regulatory and other risks. V Scores
apply to the entire transaction.
While the overall score is Medium-High, there are positive
deviations from 'Medium-High' within the individual categories.
Market value sensitivity is low since the virtual print fees are the main
driver of the revenues and are not subject to market value fluctuations.
Moody's Parameter Sensitivities. Moody's analyzed the potential
model-indicated rating impact under different stress scenarios.
The main driver of the revenues to the model is the screen turnover.
In the model, Moody's randomly chooses the screen turnover.
For the stress cases, Moody's used a static screen turnover and
observed the modeled ratings at each decreasing level of screen turnover.
Decreasing the annual screen turnover from the base case to 13,
10, 9, the model indicated ratings would change from Baa1
(sf) to Baa1, Ba1, B2, respectively. For reference,
for the last eight years, the average screen turnover has been 14.1
with the lowest point in 2003 of 13.2.
Parameter Sensitivities are not intended to measure how the rating of
the security might migrate over time; rather they are designed to
provide a quantitative calculation of how the initial rating might change
if key input parameters used in the initial rating process differed.
The analysis assumes that the deal has not aged. Parameter Sensitivities
only reflect the ratings impact of each scenario from a quantitative/model-indicated
standpoint. Qualitative factors are also taken into consideration
in the ratings process, so the actual ratings that would be assigned
in each case could vary from the information presented in the Parameter
Sensitivity analysis.
PRINCIPAL RATING METHODOLOGY
SUMMARY. In rating the loans, Moody's uses Monte Carlo simulation
with the key input to the model being the annual number of digital prints
per screen. An analysis and assessments of the reliance on film
distributors, DCIP's ability as servicer, the Exhibitor Group's
sponsorship quality, market trends in the film industry and the
transaction's structural characteristics are also key elements in the
rating process.
BACKGROUND. DCIP was formed by AMC Entertainment Inc. (B1,
stable outlook), Cinemark Holdings Inc. (B1, stable
outlook), and Regal Entertainment Group (B3, stable outlook)
(collectively the Exhibitor Group) to upgrade their 35mm projectors in
the U. S. and Canada to digital systems. Kasima uses
drawings under the SCF as the primary source to finance the costs associated
with acquiring and installing digital cinema projectors and related equipment
in the Exhibitor Group's theaters. The advances under the SCF are
secured, primarily, by the rights to VPFs payable by film
distributors for all digital prints exhibited at the theaters where the
digital cinema projectors are installed. Additional minor sources
of income securing the SCF and available to repay advances include rental
payments 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.
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 is $0). Furthermore, the studios
are committed to release films in digital while the exhibitors are required
to play them digitally if the screens are available. Other distributors
not under contract will be charged a VPF at least equal to the VPF charged
to the major film distributors.
MONTE CARLO CASH FLOW ANALYSIS: Monte Carlo simulations are run
to analyze the debt structure using key input parameters. We calculate
the cash flows that would be available to investors under different scenarios,
including those from any credit enhancement that would be available to
offset shortfalls. Based on those cash flows, we calculate
the scenario's internal rate of return (IRR). To determine the
rating suggested by our model, we calculate the average of the internal
rates of return across all of the simulations and compared that average
to the internal rate of return for the loans assuming that lenders had
been paid in full. We then compare that difference --
i.e., the reduction in IRR resulting from credit losses
-- to our "benchmark" IRR reductions for each rating category
to determine the model-suggested rating for the loans.
The key input to the model is the 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. Historical data
suggests that the turnover for all screens can varies between 12x and
16x on average (that is, 12 to 16 different films per screen per
year).
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
quicker 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 must be considered.
Based on the great uncertainty regarding future VPFs, and the simulations
were run with a wide ranging distribution for values based on the factors
mentioned above. Specifically, VPF was assumed to be uniformly
distributed 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.
Also no sale or redeployment was assumed in these cases.
The current public ratings notched down one rating level to determine
probability of default and a uniformly distributed theater closure rate
upon default of 5% to 25% were used for simulation.
QUALITATIVE FACTORS: The qualitative analysis focused on the ratings
of the film distributors and the operational, and executions risks
of DCIP, and the equipment functionality. As discussed in
the ratings rationale, each issue has a potential negative impact
on the performance of the transaction.
Ratings of the film distributors. The Borrower derives approximately
90% of its revenues from the film distributors, with the
majority of the cash flow associated with only six distributors.
The weighted average credit rating of all the film distributors is approximately
Baa3. Due to the significant reliance on these firms, the
ratings of the loans is limited by the credit ratings of the film distributors
and the loans ratings could be only slightly higher than such credit ratings.
DCIP. DCIP was formed in February 2007 to upgrade the Exhibitor
Group's 35mm projectors in the U. S. and Canada to digital
projection systems. The ability of DCIP to implement the deployments
of the new systems is key to the performance of the transaction.
To date, the deployment of systems exceeded initial targets,
and therefore eradicates some of the risks associated with execution;
specifically, the successful rollout removed some contract termination
provisions. Nevertheless, DCIP still has limited track record.
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. Since closing, the installed systems have performed
according to expectations and experienced only few problems.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
in this transaction.
REGULATORY DISCLOSURES
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.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purpose of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
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.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
William Black
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns definitive rating to Kasima's Incremental Term Loan
