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Rating Action:

Moody's downgrades Metro-Goldwyn-Mayer Inc.'s CFR to Ba3; assigns ratings to new bank facilities; outlook is negative

13 Jun 2018

New York, June 13, 2018 -- Moody's Investors Service ("Moody's") downgraded Metro-Goldwyn-Mayer Inc.'s ("MGM") corporate family rating (CFR) to Ba3 from Ba2 and probability of default rating to Ba3-PD from Ba2-PD due to a change in financial policy resulting in higher than expected near-term leverage and higher longer-term leverage targets. In addition, the company plans to refinance its debt. As a result, Moody's assigned a Ba2 rating to the company's new 1st lien senior secured credit facilities consisting of a $1.6 billion revolving credit facility due 2023 (upsized from the existing $1 billion revolver) and a $400 million term loan due 2025, and assigned a B2 rating to its new $500 million 2nd lien senior secured term loan due 2026. At the close of the transaction, there will be approximately $437 million drawn under the new revolving credit facility. Proceeds from the new term loans and revolver draw will be used to repay the existing $850 million term loan and the $487 million expected to be drawn under the existing $1 billion revolving credit facility. The addition of the 2nd lien structure provides lift to the first lien senior secured credit facility ratings, which are rated Ba2, one notch above the Ba3 CFR. Moody's will withdraw the existing 1st lien term loan and revolving credit facility ratings upon close of the transaction, expected at the end of June 2018. The outlook is changed to negative from stable.

Assignments:

..Issuer: Metro-Goldwyn-Mayer Inc.

....$1600mm Gtd Senior Secured 1st Lien Revolving Credit Facility, Assigned Ba2 (LGD3)

....$400mm Gtd Senior Secured 1st Lien Term Loan, Assigned Ba2 (LGD3)

....$500mm Gtd Senior Secured 2nd Lien Term Loan, Assigned B2 (LGD5)

Downgrades:

..Issuer: Metro-Goldwyn-Mayer Inc.

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD

.... Corporate Family Rating, Downgraded to Ba3 from Ba2

Outlook Actions:

..Issuer: Metro-Goldwyn-Mayer Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

MGM's Ba3 CFR reflects high leverage for 2018 and 2019 due to accelerated spending on film and television content, including a ramping of upfront spending on content to bolster the company's EPIX premium pay TV network, and our expectations of gradually declining leverage thereafter towards around 2.5x (including Moody's standard adjustments). The high leverage compared to the historical modest debt and leverage levels resulted from both the initial increase from the $855 million debt-financed (net of cash acquired) EPIX acquisition in May 2017 and the higher than expected planned increase in film and TV content spend extended through 2020.

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 have been historically stable and strong. However, with the new upsized revolver, we expect the company to make significantly higher investments in content to ramp up more quickly original EPIX series to expand its distribution and subscriber base. We believe that the front-end spending on the company's film (including the next Bond film) and television slate are strategically beneficial, but financing the build up with all debt adds financial risk to business risks that are higher than average. We anticipate the build up to negatively impact credit metrics through 2020. As a result, we anticipate that free cash flow will be negatively impacted through 2019 and debt reduction will not ramp back up until 2020 and 2021.

In Moody's opinion, the higher leverage and change in financial policy is a departure from the company's very conservative financial policies espoused by its departing CEO Gary Barber, who had led the company since it emerged from bankruptcy in 2010. The company also intends to borrow additional debt to consummate a strategic share repurchase, which we believe will add about three quarters of a turn of leverage. It is possible that MGM will take steps to mitigate the negative impact on debt and leverage from the share repurchase, in which case the rating outlook may be stabilized. Absent this action, the debt funded purchase could lead to a further downgrade in the near-term.

Although Moody's believes the EPIX acquisition provides synergy opportunities, further diversification of revenue and additional growth opportunities long term, the materially higher debt taken on and additional debt funded investments in content expected adds much additional financial risk to the balance sheet. We note that EPIX has been an underperforming asset that has yet to achieve full US distribution. The rating also reflects risks associated with new film production that typically is funded from the company's library cash flows which now are being diverted, and reflects uncertainty surrounding theatrical performances of films and substantial upfront costs involved in producing, marketing and distributing films.

The company typically fields a relatively modest slate of films and has had a good industry box office record to date, particularly benefiting from the successful James Bond franchise. By its nature, television is inherently less financially risky over time as series with solid avidity can be sustained longer, and represents an important area of growth for the company, both in terms of supporting the growth plans for EPIX and as a provider of TV content for other company outlets. Moody's remains cautious about volatility inherent in the motion picture industry and notes that expectation of modest leverage levels was key to the previous Ba2 rating, 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.

Moody's expects that the company will invest a considerable amount on new content and will have significant negative cash flows through 2019, and as a result, leverage will be elevated over the next 24 months. After that, the ratings incorporate the expectation that leverage will decline by nearly a turn each year thereafter until it approximates 2.5x. Any delays in that trajectory could impact the ratings in the future. In addition, we expect that MGM will sustain adequate liquidity while generating negative free cash flow in the near term due to the ramp up in spending.

As the company's rating is expected to be weakly positioned through 2019, an upgrade is unlikely. A rating downgrade could occur if a deleveraging trajectory is not on track by 2020 and leverage is sustained above 3.0x (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 following the period of capital intensive content investments. Significant ratings pressure would also be prompted by a radical or permanent shift towards even more aggressive financial policies or a stumble by MGM's new and yet proven leadership team as a group.

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 3/31/2018 were approximately $1.3 billion. As of March 31, 2018, Anchorage Capital Partners, Highland Capital Partners and Solus Alternative Asset Management 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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

John Diaz
MD - Corporate Finance
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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