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21 Apr 2011
Approximately US$275 million of debt commitments affected
Toronto, April 21, 2011 -- Moody's Investors Service (Moody's) upgraded Cinram International Inc.'s
(Cinram) corporate family rating (CFR) and probability of default rating
(PDR) to Caa1 and Caa2, respectively, from Caa2 and Caa3,
in response to the company's completed capital restructuring activities
(initially announced on January 25, 2011). As part of the
rating action, the company's revolving credit facility (previously
rated Caa1) which has been segregated into two tranches, was rated
B1 (the US$21 million "first out" tranche with repayment
priority) and B3 (the remaining US$14 million). The latter
tranche is ranked equally with Cinram's downsized term loan,
which is also rated B3. The company's speculative grade liquidity
rating was revised to SGL-3 (adequate) from SGL-4 (poor).
The restructuring does not change Cinram's core DVD/CD replication
business, but it does eliminate some US$120 million of debt
obligations by converting them to an instrument we consider to be equity-like,
and provides a nearly three year term to maturity, thereby significantly
easing refinance risks. This allowed the outlook to be changed
The following summarizes Cinram's ratings and today's rating actions:
..Issuer: Cinram International Inc.
....Corporate Family Rating, upgraded
to Caa1 from Caa2
....Probability of Default Rating, upgraded
to Caa2 from Caa3
....Senior Secured First-out Revolving
Facility rated B1 (LGD1, 3%)
....Senior Secured Second-out Revolving
Facility rated B3 (LGD2, 26%)
....Senior Secured Bank Credit Facility rated
B3 (LGD2, 26%)
..Speculative Grade Rating, changed to SGL-3
(adequate) from SGL-4 (poor)
...Outlook, Changed to stable from negative
SUMMARY RATING RATIONALE
Cinram's Caa1 CFR and Caa2 PDR reflect the risks of focusing on
a declining business, DVD/CD replication, and not having the
financial flexibility to change businesses. Not only is demand
for DVD/CD's declining, the rate of decline is likely accelerating
as DVD rental and on-line streaming continues to gain traction.
Consequently, despite seemingly reasonable leverage, Cinram
generates only moderate free cash flow. The relatively small free
cash pool is not sufficient to fund meaningful diversification efforts,
and it is unclear whether the company can generate sufficient cash flow
to retire its debts prior to their stated maturity and, if not,
whether it will be able to roll-over the unamortized residual at
maturity. In addition, the recent recapitalization improves
liquidity and buys the company time to figure things out, but is
not a panacea.
With refinance pressure moved out, the outlook is stable.
As the maturity of the new credit facilities advances, there may
be need to reconsider the outlook.
What Could Change the Rating - Up
Positive ratings and outlook actions may result from a significant reduction
in the company's debt.
What Could Change the Rating - Down
Liquidity and refinance will lead Cinram's rating. Should
liquidity arrangements materially deteriorate, negative rating action
may be required. As well, as the loan maturity date approaches
and depending upon then prevailing refinance prospects, adverse
rating actions may be required.
The principal methodologies used in this rating were Global Manufacturing
Industry published in December 2007, Probability of Default Ratings
and Speculative Grade Liquidity Ratings published in June 2009,
and Speculative Grade Liquidity Rating September 2002.
With headquarters in Toronto, Ontario, Canada, Cinram
International Inc. is one of the world's largest independent manufacturers,
replicators and distributors of DVDs and audio CDs.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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
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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
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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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Canada Inc.
Moody's upgrades Cinram's CFR/PDR to Caa1/Caa2, outlook stable
70 York Street
Toronto, ON M5J 1S9
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