Moodys.com - Rating Action :
Moody's Investors Service assigned Ba3 ratings to LodgeNet Entertainment Corporation's (LodgeNet's) proposed senior secured $75 million revolving credit facility and senior secured $150 million term loan B. The ratings on LodgeNet's $30 million 11.5% and $150 million 10.25% senior unsecured notes due 2005 and 2006, respectively, were confirmed at B1. Ratings on the existing credit facilities have been withdrawn. The senior implied and unsecured issuer ratings were confirmed at Ba3 and B1, respectively. The outlook for all ratings remains stable.
The ratings reflect high financial leverage and low debt service coverage; the impact seasonality of and economic cyclicality on the lodging industry; dependence on film studios for quality product; high planned capital investment rendering the company free cash flow negative for the foreseeable future; and a high degree of market saturation limiting prospects for domestic growth in installed rooms.
The ratings are supported by the company's ability to meet Moody's expectations; strong growth in the installed room base; prospects for revenue growth through the rollout of broadband Internet services; poetential for greater efficiency achieved through the deployment of digital technology; long-term nature of the company's contracts with hotel operators; variability of capital expenditures; and the signing of the Hilton Hotels contract which gives the company access to an additional 350,000 rooms.
The proceeds of the facilities will be used to refinance the company's existing bank credit facilities and provide liquidity to allow for the build-out of the Hilton contract and upgrade the companies existing room base from a tape based system of distribution for on-demand movies to a server based system.
The Ba3 rating on the bank credit facilities reflects security interest in all assets of the company and the existence of upstream guarantees. The senior implied and bank loan ratings have been set at parity to reflect the large and growing presence of bank debt in the overall capital structure of the company. The ratings on the senior unsecured notes reflect their weaker position relative to the secured bank credit facilities.
In October 2000, LodgeNet signed a seven year master services agreement with Hilton Hotels which potentially gives the company access to over 350,000 owned, managed and franchised rooms. LodgeNet expects to phase in the additional rooms over the next five years. Additionally, the company will be the preferred provider of interactive services for Hilton's managed and franchised hotels. In conjunction, Hilton and LodgeNet created Inn Media, a 50/50 joint venture, to develop interactive television content which will be accessed via LodgeNet's platform. Each will contribute $5 million to the partnership.
Between LodgeNet and On Command, the company's chief competitor and the market leader, the market for distribution of on-demand video and video game entertainment have become saturated in hotels containing 150+ rooms. LodgeNet's growth of installed base will largely be limited to installation in hotels with 75+ rooms, which may be economically less appealing, and taking competitor market share. Although LodgeNet was successful in taking the Hilton contract away from On Command, Moody's notes that On Command has Liberty Media (senior unsecured Baa3) as its equity sponsor which can provide a measure of support in protecting the On Command installed base from further contract losses.
Additionally, LodgeNet is exposed to a number of factors that it has little or no control over. The company is reliant on hotel occupancy rates, which are higher during the second and third quarters due to seasonal travel patterns. Occupancy and service buy rates are impacted by economic trends more broadly. Finally, buy rates are impacted by the quality of film product released to the company by motion picture studios.
LodgeNet provides cable, video-on-demand and video game entertainment services to the lodging industry. The company maintains its headquarters in Sioux Falls, South Dakota.
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