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Rating Action:

Moody's downgrades Metro-Goldwyn-Mayer Inc.'s CFR to B1; outlook is stable

25 Mar 2020

New York, March 25, 2020 -- Moody's Investors Service ("Moody's") downgraded Metro-Goldwyn-Mayer Inc.'s ("MGM") corporate family rating (CFR) to B1 from Ba3 and probability of default rating to B1-PD from Ba3-PD due to sustained high leverage with expectations that leverage will remain high during the next 12 to 18 months before improving towards the end of 2021 to a level consistent with a B1 CFR. Concurrently, Moody's downgraded the company's 1st lien senior secured credit facility, consisting of a $1.8 billion revolving credit facility due 2023 and a $400 million term loan due 2025, to Ba3 from Ba2 and downgraded its $400 million 2nd lien term loan due 2026 to B3 from B2. The outlook is stable. This rating action concludes the review for downgrade initiated on June 13, 2019.

Downgrades:

..Issuer: Metro-Goldwyn-Mayer Inc.

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

.... Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Secured 1st Lien Bank Credit Facility, Downgraded to Ba3 (LGD3) from Ba2 (LGD3)

....Senior Secured 2nd Lien Bank Credit Facility, Downgraded to B3 (LGD5) from B2 (LGD5)

Outlook Actions:

..Issuer: Metro-Goldwyn-Mayer Inc.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

MGM's B1 CFR reflects temporarily high gross leverage of as high as 9.0x at the end of 2019 due to the company's increased spending to bolster its EPIX premium pay TV network and film and television content production funding before it scales down to our expectations of over 5.0x (including Moody's standard adjustments) through much of 2020 as profitability benefits from reduced content spending. The acquisition of EPIX in 2017 caused credit metrics to deteriorate as the acquisition was financed with debt. We believe that peak debt and leverage occurred in 2019, with the financing of the latest James Bond film production. The B1 CFR reflects our expectations of gradually declining net-leverage to under 4.0x by the end of 2021 as the company begins to repay its revolver borrowings, experiences cash flow improvement and leverage is reduced aggressively.

Prior to the company's debt-financed acquisition of the EPIX stake that it did not already own, debt was modest and free cash flows were historically stable and strong. However, front-end spending on the company's film (including the next Bond film) and television slate along with the build up of EPIX to expand its distribution and subscriber base added financial risk to a company with higher than average business risks. As a result, the credit profile deteriorated from 2017 to 2019. We believe that management has recently pivoted its EPIX strategy from becoming a larger scale streaming player, to a more nimble, cash flow producing programmer. This switch is driven by the steeper competitive forces and significant capital requirements needed to achieve previous goals. The result is less than expected capital spending and lower leverage and we believe that 2019 was the peak borrowing and investment year. We believe that the 2019 results were negatively impacted, but the pivot led to the decline in content spending as compared to the original strategy and resulted in lower than expected leverage, though still very high for its credit rating. We believe that free cash flow and debt reduction will not ramp back up until late 2020 and 2021.

Although Moody's believes the EPIX acquisition provided synergy opportunities, further diversification of revenue and additional growth potential, MGM has limited balance sheet capacity to compete with its much larger rivals. The materially higher debt taken on and additional debt funded investments in content added much additional financial risk to the balance sheet and drove leverage to the high single digits. We note that EPIX has been an underperforming asset, although there has been improvement, particularly with the addition of EPIX to the Comcast premium network package which provides new guaranteed contractual high margin revenues.

The rating also reflects risks associated with new film production that typically is funded from the company's library cash flows which are being diverted, and reflects uncertainty surrounding theatrical performances of films and substantial upfront costs involved in producing, marketing and distributing films. At this time however, the spread of the coronavirus has caused most television and film production to come to a halt, and theatrical film releases have been delayed. Therefore, cash outflows for working capital for production costs and theatrical prints and ads are not being spent. We do expect the company to continue benefiting from exploitation of its large film and television library as there is great demand for content, and particularly at this time when there is limited new content available, so there is some potential for upside library performance during this period in our view. The latest Bond film release has been delayed from April to November this year, so the significant cash flow expected from this franchise film will move to 2021. Other films are also being rescheduled, and some smaller budget films yet released at studios like MGM's may be licensed to streaming platforms to recover production costs and profits, so in our view, this could be an opportunity for the company to monetize some assets. Moody's remains cautious about volatility inherent in the motion picture industry and notes that expectation of modest leverage levels was key for the company's credit given the potential for steep deterioration in profitability and cash flows from lackluster theatrical performances of feature films. Accordingly, we believe it is imperative for companies in the feature film and television production and distribution business to operate with modest debt levels in their capital structure and maintain a strong balance sheet.

The stable outlook reflects our expectations that the company will reduce debt and leverage to under 4.0x by the end of 2021 (including Moody's adjustments). The outlook also assumes the company will revert back to generating consistent positive free cash flows as the large debt funded investments in content level to more consistent levels. In addition, we expect that MGM will sustain adequate liquidity.

As the company's rating is expected to be weakly positioned through 2020, an upgrade is unlikely in the near term. Over the next few years, the ratings could be upgraded if management commits to more conservative financial policies and leverage is sustained under 3.0x. A rating downgrade could occur if a deleveraging trajectory is not on track by 2021 and leverage appears will be sustained above 4.0x (Moody's adjusted). The rating could also be downgraded if the company's liquidity position comes under pressure, or cash flow generation does not improve during the next 12 months. Significant ratings pressure would also be prompted by a radical or permanent shift towards even more aggressive financial policies.

MGM has an adequate liquidity profile supported by good cash balances, and covenant-lite loans with good cushion. The company currently has more than $800 million of cash and revolver availability and we expect liquidity to improve from this level in 2020 and beyond. The credit agreement governing the revolving credit facility contains an asset based calculation to determine availability. We anticipate that the company will have full availability to the revolver over the near term. We estimate that MGM will remain well in compliance with financial covenants over the intermediate term. The facility does contain a material adverse change clause. The revolver matures in July of 2023, while the company's First Lien Term Loan matures in 2025 and second lien term loan in 2026.

With regards to our ESG framework, environmental and social risks are usually not a factor in the rating process for companies in the motion picture business. However, with the recent spread of the coronavirus and subsequent movie theater closures across the country, we view this as a social risk and expect it to create delays in film releases and revenues until the threat of the spread has subsided. However, the company's recent operational pivot and commitment to repaying debt with free cash flow indicates a more balanced policy and is credit positive.

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 motion picture sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand, sentiment, and box office success. More specifically, the weaknesses in MGM's credit profile, including its exposure to the success of its films in theatres, which are now closed throughout the country to limit the spread of the virus, have left it vulnerable in these unprecedented operating conditions and MGM 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.

Metro-Goldwyn-Mayer Inc., based in Beverly Hills, California, produces and distributes motion pictures, television programming, home videos, interactive media, music, and licensed merchandise. It owns a library of films and television programs and holds ownership interests in domestic and international television channels. Revenues for LTM ended 9/30/2019 were approximately $1.6 billion. As of September 30, 2019, Anchorage Capital Partners and Highland Capital Partners each individually, or together with their affiliated entities, owned more than 10% of the issued and outstanding shares of common stock of MGM Holdings. MGM Holdings is the ultimate parent company of the MGM families of companies, including its subsidiary Metro-Goldwyn-Mayer Inc.

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.

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.

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.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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