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Global Credit Research - 12 May 2010
$1,000 Million in loan interests rated.
New York, May 12, 2010 -- Moody's Investors Service (Moody's) has assigned the provisional rating
of (P)A2 to the proposed new tranches to be effected by amendment to the
existing credit facility, currently rated A2, extended to
Village Roadshow Films (BVI) Limited (Borrower), an indirect subsidiary
of Village Roadshow Pictures Group (VRPG). The new tranches of
the amended credit facility will consist of the Class A-1 Ultimates
Facility, the Class A-2 Ultimates Facility, and the
New Films Facility (collectively, the Credit Facility) and will
replace the existing tranches. This transaction is a securitization
of international film and distribution rights and related net cash flows
from a seasoned slate of 64 films plus any future financed films.
The complete rating action is as follows:
$250,000,000 Class A-1 Ultimates Facility,
$500,000,000 Class A-2 Ultimates Facility,
$250,000,000 New Films Facility, rated (P)A2
VRPG, founded in 1997, is the film production division of
Village Roadshow Entertainment Group (VREG) which also owns the Concord
Music Group. VREG is approximately 40% owned by Village
Roadshow Limited (VRL), a publicly listed company based in Australia.
Since VRPG's creation, 64 films have been co-financed
with major motion picture studios, primarily Warner Bros.
(WB, a subsidiary of Time Warner Inc. -- Baa2).
The 60 films co-financed with WB since 1997 represent almost one-quarter
of WB's film production over this period.
The collateral for the Credit Facility are the international film rights
and net cash flows from the current slate of films and future films which
may be co-financed. (The international film rights include
all regions other than U.S. and Canada.)Moody's
provisional ratings of the Credit Facility are primarily based on:
(i) substantial equity both contributed and internally accumulated through
the performance of the current film slate (as reflected by current valuations);
(ii) the substantial role of WB in this Credit Facility as demonstrated
by agreements for sub-distribution, back-up distribution,
and certain advances required at the request of the lenders; (iii)
structural features within the transaction to protect lenders such as
a dynamic borrowing base, minimum equity requirements, and
subordination of some repayment for prints and advertising cost advances;
and (iv) alignment of interests of all transaction parties supported by
structural features whereby cash leakage or other distributions out of
the Credit Facility to the sponsor are extremely limited.
The main risks to this Credit Facility are the potential for investment
in future films which perform poorly and possible performance volatility
of the existing library. As the Credit Facility expects to fund
future films during a three-year revolving period, the performance
of these new films may vary greatly. For the films already in the
library, individual film performance based on initial projections
widely ranged from a loss of 70% of the initial investment to above
200% return on investment, and thus any single new film investment
would pose some risk due to this unpredictability of performance.
A lower advance rate for new films, currently approximately 50%
of cost, is intended to mitigate this risk. For the seasoned
films currently financed by the Credit Facility, a dynamic borrowing
base is used to determine a maximum advance rate for debt against an independent
third party valuation. The valuations are discounted present values
of cash flow projections for international box office revenues,
television licensing, DVD sales and other merchandising for each
film. While largely contract-based, as macro-economic
conditions, among many other factors, change, these
projected cash flows remain somewhat exposed to fluctuation. For
our detailed analysis of these and other risks, please read further
in the Principal Rating Methodology section.
V SCORE AND PARAMETER SENSITIVITY
V Score -The overall V Score for this transaction is Medium.
This indicates average structure complexity and uncertainty about critical
assumptions. The Medium overall score is driven by a variety of
factors. Historic film performance for the sector is available
through many securitizations, however the data generally lacks certain
relevant information. For this Borrower, the historical data
is provided with the necessary detail and their reporting shows film by
film level information leading to lower variability for data adequacy
compared to its peers. With the separate facility waterfalls within
the Credit Facility, the transaction complexity was higher than
most transactions while the analytical complexity was average.
Finally, the experience and contractual arrangements of the parties
involved shows below average variability with the roles of WB and VRPG.
Parameter Sensitivities -- The rating is not model determined but
based on a combination of qualitative and quantitative factors.
As such, parameter sensitivities cannot be provided. Major
risks that could drive negative ratings pressure include: significant
decline in projected cash flow as represented by lower valuations;
and significant ratings decline of Time Warner, Inc. especially
in conjunction with operating weakness at WB.
PRINCIPAL RATING METHODOLOGY
Moody's principal methodology used for rating this Credit Facility
can be split into two different parts: (i) structural features and
contractual obligations of related parties and (ii) cash flow analysis
of the expected cash flow from existing films and profitability of potential
new film investments. Together, these items formed the basis
for the Credit Facility ratings.
Structural Features and Contractual Obligations
Film rights will be acquired by VRPG (or already have been acquired for
existing films) and subsequently transferred to the Borrower. VRPG
represents and warrants that no non-permitted liens exist on the
international film rights and that this transfer constitutes a true sale
of assets to the Borrower. As such, the Borrower will own
the legal title to the international distribution rights and a security
interest in all proceeds generated from exploitation of these rights.
Structural protections in the transaction include a dynamic borrowing
base to limit debt, a minimum equity test, net receipts test,
and a minimum production investment credit all of which must be met to
fund new film investments. On a qualitative level, the advance
rates allowed in this transaction as proposed by the dynamic borrowing
base were reviewed and are at levels consistent with the rating for this
unique asset. The minimum equity test, net receipts test,
and a minimum production investment credit were analyzed in detail using
certain static calculations to measure their ability to stop funding in
new films. As applied together in the context of this Credit Facility,
our analysis found these measures highly effective at limiting exposure
to unprofitable new films.
The reliance on WB for this transaction is important in our analysis as
they are the main distributor for the co-financed films.
Our qualitative analysis focused on their requirements to meet a minimum
and maximum release costs to support a film's release as well as
their required advance at maturity upon request from the Borrower or the
Credit Facility lenders. The levels set for the distributions costs
and advance amount required are deemed to be sufficient support for this
credit facility at this rating level. Furthermore, the strength
of WB's worldwide distribution network also played into our analysis.
VRPG's ability to select profitable films was also a key element
as shown by the success of the current film slate. Along with their
abilities to distribute in their select regions and abilities as servicer
for this transaction, VRPG's overall role in the Credit Facility
benefits the transaction.
Finally, when taking into account the structural features and roles
of VRPG and WB, the alignment of all parties to the success of the
film slate is an important element. Qualitatively, this alignment
of interests is a distinct strength for this transaction.
Cash Flow Analysis
The cash flow analysis for this transaction was split into two parts:
(i) projected cash flow of existing films in the slate and (ii) expected
cash flow for any new films financed. For the projected cash flow
of the existing slate, an analysis was conducted using annual historical
projections versus collection on a per film basis. Our detailed
analysis looked at aggregate trends in collections per film per year and
also variability of these projections. On average, each film
historically has generated 16% more collections than projected
for the actual films in the slate. However annual collections per
film have a high degree of variability. Historically from a static
data set of projections from 2004, annual collections per film exceeded
projections on average by about $570,000 with a wide range
from $3.4 mm short of projections to $4.6
mm of exceeding projections. As the advance rate for the Ultimates
Facility is limited to 75%, the collections would have to
be substantially below the actual collections to incur a loss to this
Credit Facility even with large variability in collections per film.
Monte Carlo simulation analysis was conducted to assess the performance
of the Credit Facility given new film investments. Future film
revenue was projected by sampling film performance data for current film
slate using the cost-coverage-ratio (CCR, defined
as the undiscounted projected cash flow projections divided by the investment
amount) as a proxy. The entire data set of 64 films was reduced
by excluding all films with a CCR above 1.2x (only 38 of 62 seasoned
films included in this data set). The average CCR for the new data
set is approximately 0.8x which implies an undiscounted 20%
loss on any new film investment. At an assumed investment rate
of one film per quarter, each new film was sampled using the 38
film dataset to determine a CCR as a proxy of the projected cash flows
for the new film. During simulation, the cash flow through
the waterfall including performance measures was calculated and Credit
Facility performance was measured. Additional scenarios were run
to haircut all cash flow from new films in amounts of 10% and 20%.
That is, all expected cash flow was reduced by this amount for each
period for each film sampled. The Monte Carlo simulation results
for all scenarios showed the significant strength of the performance measures
as the new film investment was quickly stopped allowing for pay down of
the Credit Facility in all iterations. Thus our analysis shows
little exposure to new unprofitable film investments.
Additional research is available at www.moodys.com.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's assigns provisional rating to proposed amended Village Roadshow Films (BVI) Limited film finance facility
Structured Finance Group
Moody's Investors Service
No Related Data.
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