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Rating Action:

Moody's downgrades Hit's CFR to Caa1; outlook remains negative

20 Dec 2010

Approximately $560 million of rated debt commitments affected

Toronto, December 20, 2010 -- Moody's Investors Service (Moody's) downgraded Hit Entertainment Inc.'s (Hit) corporate family rating (CFR) to Caa1 from B3 while simultaneously downgrading the company's probability of default (PDR) to Caa2 from Caa1. The rating outlook remains negative. The action was prompted by the company's ongoing struggle to generate positive free cash flow as it prepares for the mid-2012 maturity of a significant proportion of its credit facilities. We think that efforts to improve cash flow and results will, of necessity, involve much needed programming investments that will limit free cash flow expansion. When combined with a lack of forward visibility of the company's licensing-based cash flow -- an issue that has been problematic for some time -- it is not clear how the company's cash flow profile will be perceived by lenders as the maturity of credit facilities approaches. With most of the company's recent performance having been somewhat checkered, causing a sharp rise in leverage, we think lenders will be reluctant to provide management with a runway to deliver performance enhancements and, alternatively, will want to observe demonstrated progress before re-extending financing; in turn, with each quarter that tangible progress is delayed, refinance risk increases. Accordingly, the ratings outlook remains negative.

The following summarizes Hit Entertainment, Inc.'s ratings and today's rating actions:

Downgrades

Corporate Family Rating, downgraded to Caa1 from B3

Probability of Default Rating, downgraded to Caa2 from Caa1

Senior Secured First Lien Bank Credit Facility, downgraded to B2 (LGD2, 18%) from B1 (LGD2, 18%)

Senior Secured Second Lien Loan, downgraded to Caa3 (LGD4, 68%) from Caa2 (LGD4, 68%)

Outlook actions:

Outlook unchanged at negative

RATINGS RATIONALE

At this juncture, the primary ratings influence relates to the need to refinance term debt that matures in 2012 and the high debt leverage. With most of the company's recent performance having been somewhat checkered, we think lenders will be reluctant to provide management with a runway to deliver performance enhancements and will want to observe demonstrated progress before re-extending financing. We think that efforts to improve cash flow and results will, of necessity, involve much needed programming investments that will limit free cash flow expansion. When combined with a lack of forward visibility of the company's licensing-based cash flow -- an issue that has been problematic for some time -- it is not clear how lenders will perceive the company's cash flow as the maturity of its credit facilities approaches. This suggests that asset sales and/or a sale of the company may be required. Since these are events that depend on third parties and valuations are difficult to gauge given the company's tepid financial performance and the specialized nature of its properties, refinance risk is considerable.

Rating Outlook

As Hit looks to refinance its bank credit facilities, with each quarter that tangible progress in expanding free cash flow is delayed, refinance risk increases. Accordingly, the ratings outlook remains negative.

What Could Change the Rating - Up

Positive outlook and ratings actions depend on the successful refinance of the company's debts. With that and reasonable underlying fundamentals, were TD/EBITDA on a trajectory to be less than 7x and were FCF/TD to be consistently positive, consideration for positive ratings action could result.

What Could Change the Rating - Down

Near-term ratings actions will depend on refinance activities. Should the related challenge increase, adverse ratings actions may be required.

The principal methodologies used in this rating were Probability of Default Ratings and Loss Given Default Assessments published in June 2009, and Speculative Grade Liquidity Ratings published September 2002.

Corporate Profile

With offices in London, England and New York, HIT is involved in the creation, production and international exploitation (via television, video, publishing, licensing and live events) of properties (including Bob the Builder, Thomas the Tank Engine, and Barney) catering to pre-school children.

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 purposes of maintaining 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.

Toronto
Bill Wolfe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

New York
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Canada Inc.
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Suite 1400
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Canada
(416) 214-1635

Moody's downgrades Hit's CFR to Caa1; outlook remains negative
No Related Data.
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