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Rating Action:

Moody's downgrades Cirque du Soleil's CFR to Ca; outlook negative

18 Mar 2020

Toronto, March 18, 2020 -- Moody's Investors Service, ("Moody's") downgraded CDS U.S. Intermediate Holdings, Inc.'s (Cirque du Soleil) corporate family rating (CFR) to Ca from B3, probability of default rating to Ca-PD from B3-PD, first lien secured term loan rating to Caa3 from B2 and second lien secured term loan to C from Caa2. The outlook was changed to negative from stable.

A summary of today's actions follows:

..Issuer: CDS U.S. Intermediate Holdings, Inc.

.... Corporate Family Rating, downgraded to Ca from B3

.... Probability of Default Rating, downgraded to Ca-PD from B3-PD

.... Senior Secured First-Lien Revolving Credit Facility due 2022, downgraded to Caa3 (LGD3) from B2 (LGD3)

.... Senior Secured First-Lien Term Loan due 2022, downgraded to Caa3 (LGD3) from B2 (LGD3)

.... Senior Secured Second-Lien Term Loan due 2023, downgraded to C (LGD5) from Caa2 (LGD5)

Outlook Action:

..Issuer: CDS U.S. Intermediate Holdings, Inc.

....Outlook, changed to Negative from Stable

RATINGS RATIONALE

The rating action reflects Moody's view of a high risk of default and follows the announcement of the temporary suspension of all Cirque du Soleil touring and Las Vegas residential shows due to the coronavirus outbreak. Revenue loss in 2020 will drive a steep decline in EBITDA generation with limited prospects for a tenable capital structure thereafter. Weak liquidity, soft show demand and challenging economic conditions will further pressure Cirque du Soleil's operating flexibility and capacity for growth capital investments once shows resume.

Cirque du Soleil (Ca CFR) is constrained by: (1) weak liquidity and deteriorating cash flows; (2) excessively high leverage expected in 2020; (3) substantial concentration in the Las Vegas market via a partnership with MGM Resorts (about 35% of revenues); and (4) execution risk around the development of new shows and limited capacity for investments in 2020. Cirque du Soleil benefits from: (1) unique brand recognition with a touring business (about 65% of revenues) providing broad geographic diversification; (2) a good track record acquiring, developing and operating new shows; and (3) a partnership operating model for resident shows that supports operating stability.

The negative outlook reflects a high risk of default and challenging operating environment in 2020.

The ratings could be downgraded if there is an event of default.

The ratings could be upgraded if the company's liquidity becomes adequate and leverage declines towards 6.5x and the operating environment improves.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The entertainment sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Cirque du Soleil's credit profile, including its exposure to Las Vegas as well as locations globally have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Cirque du Soleil, of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Cirque du Soleil has weak liquidity. As of December 2019, Moody's estimates sources totaled around $105 million, consisting of cash on hand of about $20 million and close to $85 million available (after letters of credit) under its committed $120 million revolver due June 2022. Moody's expects uses over the next twelve months to total nearly $165 million, consisting of negative free cash flow of $155 million and $8 million in term loan amortizations. Additional uses may include potential ticket reimbursements. Moody's expects Cirque du Soleil to breach the revolver's springing maximum net first lien leverage covenant of 5.25x. The company may exercise the option to cure the breach with an incremental cash contribution (equity cure) for up to two instances over four consecutive quarters. Cirque du Soleil has limited ability to generate alternate liquidity from asset sales.

Governance considerations include Cirque du Soleil's majority ownership by private equity sponsors and lack of formal financial policies combined with high leverage and event risk related with shareholder distributions and acquisitions.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Cirque du Soleil is a provider of live acrobatic theatrical performances. The company currently operates 15 resident shows and 18 touring shows under several brands. During the twelve months ended September 2019, the company generated about $950 million in revenues.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Whitney Leavens
Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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