Approximately $445 million of asset backed securities affected.
New York, March 22, 2011 -- Moody's Investors Service (Moody's) has upgraded two loans in a senior
credit facility (SCF), extended to Kasima, LLC (Borrower),
an indirect subsidiary of Digital Cinema Implementation Partners,
LLC (DCIP). These loans are primarily backed by the virtual print
fees (VPFs) payable by motion picture distributors for each instance in
which a movie is displayed in a digital format.
The complete rating action is as follows:
Issuer: Kasima, LLC - Senior Loan Facility
Senior Delayed-Draw Term Loan, Upgraded to Baa1 (sf);
previously on Mar 11, 2010, Assigned Baa2 (sf)
Senior Revolver Loan, Upgraded to Baa1 (sf); previously on
Mar 11, 2010, Assigned Baa2 (sf)
RATINGS RATIONALE
The upgrades are primarily prompted by our view that certain operational
and execution risks associated with DCIP's rollout of the digital
projection systems have not materialized and have therefore diminished
since the loans were initially rated. For example, contracts
between DCIP and the film distributors, which are critical to the
rated loans, could have been cancelled if rollout of the digital
projector systems did not meet a prescribed timeline. So far,
DCIP has outperformed the initial forecast for the rollout, a large
positive for the strength of the transaction. Finally, the
risk of contract cancellations due to equipment failure has also diminished
with the passage of time, improving the credit prospects of the
transaction.
Today's actions also reflect corrections to model output used in
the rating process. Moody's discovered errors in the original
model used to assign the initial ratings of the 2010 loans; these
have been corrected, implying a stronger credit profile.
It should be noted that model-generated output is but one factor
considered by Moody's in rating these loans, and that other
credit elements were the main driver of today's ratings actions.
Specifically, in addition to the operational and execution risks
described above, we considered the weighted average rating of the
film distributors, approximately Baa3, in our rating of the
loans.
The principal rating methodology used in rating the Loan is described
below. Other methodologies and factors that may have been considered
in the process of rating the loan can be found on www.moodys.com
in the Rating Methodologies sub-directory.
PRINCIPAL RATING METHODOLOGY
SUMMARY. In rating the loans, Moody's uses Monte Carlo
simulation with the key input to the model being the annual number of
digital prints per screen. An analysis and assessments of the reliance
on film distributors, DCIP's ability as servicer, the
Exhibitor Group's sponsorship quality, market trends in the
film industry and the transaction's structural characteristics are
also key elements in the rating process
BACKGROUND. DCIP was formed by AMC Entertainment Inc. (B1,
stable outlook), Cinemark Inc. (B1, stable outlook),
and Regal Entertainment Group (B3, stable outlook) (collectively
the Exhibitor Group) to upgrade their 35mm projectors in the U.
S. and Canada to digital systems. Kasima uses drawings under
the SCF as the primary source to finance the costs associated with acquiring
and installing digital cinema projectors and related equipment in the
Exhibitor Group's theaters. The advances under the SCF are secured,
primarily, by the rights to VPFs payable by film distributors for
all digital prints exhibited at the theaters where the digital cinema
projectors are installed. Additional minor sources of income securing
the SCF and available to repay advances include rental payments from the
Exhibitor Group for each installed digital projection system, which
will be owned by and leased from Kasima, as well as fees from the
exhibition of non-film content, such as special concerts
or live sporting events.
For an initial release of a 35mm film, a motion picture studio must
create hundreds (or thousands) of physical 35mm reels and distribute them
to each cinema. This initial "print" cost will now
be replaced by a VPF which will allow for digital transmission via satellite
or delivery of hard-disk to the cinema. For this new digital
delivery, the print cost is substantially reduced for film distributors.
To help finance this conversion to digital, many of the major motion
picture studios have agreements to pay a fixed VPF for a fixed number
of years (after which is $0). Furthermore, the studios
are committed to release films in digital while the exhibitors are required
to play them digitally if the screens are available. Other distributors
not under contract, will be charged a VPF at least equal to the
VPF charged to the major film distributers.
MONTE CARLO CASH FLOW ANALYSIS: Monte Carlo simulations are run
to analyze the debt structure using key input parameters. We calculated
the cash flows that would be available to investors under different scenarios,
including those from any credit enhancement that would be available to
offset shortfalls. Based on those cash flows, we calculate
the scenario's internal rate of return (IRR). To determine
the rating suggested by our model, we calculate the average of the
internal rates of return across all of the simulations and compared that
average to the internal rate of return for the loans assuming that lenders
had been paid in full. We then compare that difference --
i.e., the reduction in IRR resulting from credit losses
-- to our "benchmark" IRR reductions for each rating
category to determine the model-suggested rating for the loans.
The key input to the model is the VPF. A VPF is generated each
time a film is released and booked to be played on a screen, similar
to the cost of physical print which would incur a one-time cost
when created. For example, if a movie scheduled for release
to 200 digital screens domestically for the opening weekend, 200
VPF's would be generated. Then to generate more VPF's,
new films must be released while the previous films move on to the post-box
office phase. This measure is the screen turnover rate which is
the number of films played per screen per year. Historical data
suggests that the turnover for all screens can varies between 12x and
16x on average (that is, 12 to 16 different films per screen per
year).
Also, examining trends in the movie industry is important to predict
the screen turnover. Studios have been moving to shorten the theatrical
cycle, while widening the initial box office release, moving
quicker to television and DVD which would increase screen turnover.
Additionally, the number of films released has increased since 2000
which would also imply shorter theater run-time. However,
economic conditions have required film studios to reduce the number of
film projects recently so this must be considered.
Based on the great uncertainty regarding future VPFs, and the simulations
were run with a wide ranging distribution for values based on the factors
mentioned above. Specifically, VPF was assumed to be uniformly
distributed from 9.75x to 14.75 for the first three years
and 10.5x to 15x thereafter.
Exhibitor Group. Using history of theater industry bankruptcies
in the 1990's, an estimate of theater closures was simulated
for the Exhibitor Group. Upon closure, different scenarios
were run to estimate the amount of screens that would stop generating
VPF's. Also no sale or redeployment was assumed in these
cases.
The current public ratings notched down one rating level to determine
probability of default and a uniformly distributed theater closure rate
upon default of 5% to 25% were used for simulation.
QUALITATIVE FACTORS: The qualitative analysis focused on the ratings
of the film distributors and the operational, and executions risks
of DCIP, and the equipment functionality. As discussed in
the ratings rationale, each issue has a potential negative impact
on the performance of the transaction.
Ratings of the film distributors. The Borrower derives approximately
90% of its revenues from the film distributors, with the
majority of the cash flow associated with only six distributors.
The weighted average credit rating of all the film distributors is approximately
Baa3. Due to the significant reliance on these firms, the
ratings of the loans is limited by the credit ratings of the film distributors
and the loans ratings could be only slightly higher than such credit ratings.
DCIP. DCIP was formed in February 2007 to upgrade the Exhibitor
Group's 35mm projectors in the U. S. and Canada to
digital projection systems. The ability of DCIP to implement the
deployments of the new systems is key to the performance of the transaction.
To date, the deployment of systems exceeded initial targets,
and therefore eradicates some of the risks associated with execution;
specifically, the successful rollout removed some contract termination
provisions. Nevertheless, DCIP still has limited track record.
Equipment and Technology. Each installation includes a digital
projector, player, computer server, and software.
The digital projection system must meet the Digital Cinema Initiative
(DCI) specification. This DCI spec was established by a consortium
of movie studios to develop a standard for digital cinema file format,
data transmission, projector resolution, among many other
details. Once a system meets this specification, the exhibitor
is under contract to ensure proper maintenance. There is little
exposure to technology risk once a system meets this spec and begins generating
VPF's. Since closing, the installed systems have performed
according to expectations and experienced only few problems.
Moody's Investors Service did not receive or take into account a
third party due diligence report on the underlying assets or financial
instruments in this transaction.
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 purpose 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.
New York
Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades to Baa1(sf) securitized loans to Kasima, LLC
