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Rating Action:

Moody's assigns provisional rating to Kasima's Incremental Term Loan

22 Mar 2011

$220 Million securities affected

New York, March 22, 2011 -- Moody's Investors Service (Moody's) has assigned a provisional ratings of (P) Baa1 (sf) to the new senior secured Incremental Term Loan to be 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 (P) Baa1 (sf)

RATINGS RATIONALE

The Incremental Term Loan will be 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 provisional 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 Exhibit 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 (P) Baa1 (sf) to (P) Baa1, (P) Ba1, (P) 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 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 calculated 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
Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael McDermitt
VP - Senior Credit Officer
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 provisional rating to Kasima's Incremental Term Loan
No Related Data.
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