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Rating Action:

Moody's downgrades NAI's CFR two notches to B3 following theatre closures and collateral value decline; ratings on review for downgrade

24 Mar 2020

Approximately $336 million of rated debt impacted

New York, March 24, 2020 -- Moody's Investors Service ("Moody's") has downgraded NAI Entertainment Holdings LLC's ("NAI" or the "company") Corporate Family Rating (CFR) to B3 from B1 and the Probability of Default Rating (PDR) to B3-PD from B1-PD. Concurrently, Moody's downgraded NAI's credit facilities to B3 from B1, consisting of a $75 million revolving credit facility (RCF) and $300 million senior secured term loan ($261.25 million outstanding). Moody's also placed the ratings on review for further downgrade. The full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The downgrade reflects two recent credit negative events. First, Moody's expects lower revenue and EBITDA this year coupled with weakened liquidity as a result of temporary closures of NAI's theatre circuit in the US (24 theatres), Latin America (31) and the UK (21). Last week, NAI closed all of its US theatres to adhere to the federal government's recommendation that public gatherings should be restricted to ten or fewer individuals and people should engage in social distancing due to the widespread coronavirus pandemic (a.k.a., COVID-19). Similar mandates have been enacted by national governments across Europe and Latin America, which have led NAI to close its theatres in the UK, Argentina and Brazil. We expect the closures to last up to 3 months, similar to other movie exhibitors. While Moody's expects leverage to rise significantly to the 9.5x-10x area (Moody's adjusted) in 2020 due to lower EBITDA, as the virus threat is neutralized, theatres reopen and EBITDA expands with moviegoers gradually returning to the cinema for what is expected to be a relatively strong movie slate next year, we project leverage will subsequently decline to the 8x-9x band in 2021.

Second, the value of NAI's pledged ViacomCBS shares (roughly 15.4 million), which are pledged as collateral for the term loan, has fallen substantially below the 1.5x collateral value to loan covenant due to the market selloff over the past few weeks related to economic uncertainties associated with the coronavirus outbreak. Based on the most recent share price, we estimate the pledged shares are valued at approximately 0.8x the loan value. The share price decline was also exacerbated by news that the NCAA men's basketball tournament was cancelled, which is a key broadcasting event for CBS and will likely result in the loss of ad revenue. Though the company was in technical default, it received a waiver through 28 March. Moody's expects the covenant situation to be favorably resolved in the near future.

NAI also owns around 7.2 million of unpledged ViacomCBS shares. If they were pledged, Moody's estimates the total collateral value would be roughly 1.2x the loan value. Previously, the B1 rating was driven principally by the pledged and unpledged shares' high collateral value relative to the term loan balance; however given that Moody's expects asset values will remain depressed for some time, NAI's rating is now being driven by the company's underlying creditworthiness, liquidity and debt protection measures.

The review for downgrade reflects the numerous uncertainties related to the economic impact of COVID-19 on NAI's cash flows and liquidity, especially if the virus continues to spread forcing NAI to keep its theatres closed beyond June and various government financial aid programs for the theatre industry are delayed. Under this scenario, Moody's could lower the ratings if NAI exhausts its existing internal and external liquidity sources, if this becomes necessary. The review will focus on NAI's ability to reopen its theatres and the resulting timetable, the impact on liquidity as the coronavirus containment efforts continue, the extent to which attendance revives and NAI's prospects for returning to positive operating cash flow. Access to substantial additional sources of liquidity to cover a longer-than-expected cash burn period would also be considered as part of the review.

As this global crisis unfurls, NAI's balance sheet is highly levered and annual free cash flow generation has been mostly neutral to negative over the past four years due to weakening moviegoer attendance in the US and underperformance in challenged Latin American economies. At 31 September 2019, financial leverage was just over 9x (as calculated by Moody's) and LTM free cash flow was $1 million. Following strong operating performance in Q4 2019 owing to the release of several big franchise films, we project the company generated free cash flow of approximately $7.5 million in the quarter. Cash balances are just under $25 million. We expect NAI's internal liquidity combined with approximately $5.4 million of quarterly dividend income from its owned ViacomCBS shares and meaningful cost cutting measures should enable the company to absorb weakening and potentially negative operating cash flows that Moody's projects NAI will incur over the next two fiscal quarters.

Like most cinema operators, NAI has a highly variable cost structure and can quickly reduce operating costs by up to 75% in the short-run. Moody's fully expects the company to implement plans to minimize its cash burn as much as possible during the closure period via a combination of natural expense reductions (i.e., costs not incurred while theatres are closed) and management actions aimed at reductions in maintenance, utilities, payroll and theatre-level operating costs. With respect to the fixed rent costs for its theatres, Moody's expects NAI will likely seek to obtain cash relief or rent deferrals during the closure period and beyond, if necessary. In the US, the National Association of Theatre Owners (NATO) is lobbying the US Congress to urgently pass an emergency economic relief bill to provide financial assistance to the movie theatre industry. The aid package is designed to relieve the ongoing cost burden during the closure period, provide tax benefits to assist employers with providing support to employees and offer government loan guarantees to help ease the liquidity squeeze. In the UK, NAI and other cinema operators are currently working with the UK Cinema Association to lobby the government for state subsidies to cover payroll costs.

Given the possibility of its theatres remaining closed for up to three months, Moody's expects the lack of revenue generation, combined with the ongoing need to pay certain fixed expenses and debt-servicing costs, will weaken NAI's liquidity. Nonetheless, during this three-month period, we expect the company's existing liquidity sources to cover the cash burn. To the extent NAI is able to reopen its theatres by mid-June and patrons gradually return to its cinemas, the company in conjunction with the major film studios could offer promotions plus early releases and re-releases of certain premium movies to stimulate moviegoer demand, especially during the summer months when NAI typically experiences a seasonally strong box office.

The primary risk to NAI over the short-run would be a prolonged outbreak, causing its theatres to remain closed for an extended period beyond June coupled with an exhaustion of its existing sources of liquidity and an inability to timely access new liquidity sources to cover the cash burn into Q3 2020. To the extent the US emergency economic relief bill for cinema operators is signed into law before June, the government loan guarantee program could facilitate NAI's ability to access new credit lines from its banks, if this becomes necessary.

To the extent NAI's theatres reopen by mid-June, Moody's does not expect attendance to be strong in the second half of the year given that 2020 was already expected to be a weak year for big budget tentpole film debuts and movie studios have: (i) postponed releases of several films by pulling them off the spring and summer calendars due to the outbreak and pushing their releases later into 2020 or 2021; (ii) opted to simultaneously debut new films direct-to-consumer on subscription video on demand (SVOD) streaming platforms; or (iii) released movies earlier-than-normal to streaming platforms. Further, Moody's expects some consumers will be hesitant to visit theatres even after the outbreak has subsided while some moviegoers will reduce their out-of-home entertainment activities and instead watch high quality movies at home given the growing number of providers offering premium SVOD content. The stay-at-home safety measures put in place during the COVID-19 outbreak could accelerate this type of consumer behavior and some individuals could spend more time viewing movies at home even after the disease has been contained and theatres reopen. Moviegoer demand will likely remain strong for big budget "cultural event" premium films while in-home viewing will be reserved for low or medium-budget second-tier films. Despite these challenges, Moody's expects cinema operators to remain an integral part of film studios' distribution of their movie content and a key destination for consumers seeking affordable out-of-home entertainment.

ESG CONSIDERATIONS

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 movie theatre 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 NAI's credit profile, including its exposure to the US and Europe have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and NAI remains vulnerable to the outbreak's continuing 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 NAI of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered..

SUMMARY OF TODAY'S RATING ACTIONS

Ratings Downgraded:

..Issuer: NAI Entertainment Holdings LLC

Corporate Family Rating, Downgraded to B3 from B1, Placed On Review For Downgrade

Probability of Default Rating, Downgraded to B3-PD from B1-PD, Placed On Review For Downgrade

$75.0 Million Revolving Credit Facility due 2023, Downgraded to B3 (LGD3) from B1 (LGD3), Placed On Review For Downgrade

$261.3 Million Outstanding Senior Secured Term Loan B due 2025, Downgraded to B3 (LGD3) from B1 (LGD3), Placed On Review For Downgrade

Outlook Actions:

..Issuer: NAI Entertainment Holdings LLC

Outlook, Changed to Rating Under Review from Stable

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.

Headquartered in Norwood, Massachusetts, NAI Entertainment Holdings LLC is a wholly-owned subsidiary of National Amusements Inc. (a private media holding company owned by the Redstone family) and operates a significant proportion of National Amusements Inc.'s cinema assets through its 24 theatres operating in the US and 52 theatres operating internationally. Revenue totaled approximately $427 million for the twelve months ended 3 October 2019.

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.

Gregory A. Fraser, CFA
Vice President - Senior Analyst
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

Stephen Sohn
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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