The Moody’s rating came out today, generated as part of the process of Summit Entertainment refinancing its credit facilities. “Due to the company’s success over the last four years, Summit expects to substantially improve its credit terms. The company remains fully capitalized and will continue to execute its business plan,” an insider tells me. Based on this process, Summit is also expecting a rating from the S&P most likely later today. Summit intends to use the $800M to repay existing debt, finance production, and pay a distribution to shareholders. My sources say it does not look as if the money will be used towards acquisitions, at least at this point in time. Such an incredible story how this Santa Monica-based upstart independent studio which began in 2007 is now worth so much on the backs of those Twilight Saga movies. But that franchise also affected the Moody’s credit rating as both good/bad news. Here’s why: “The stable outlook reflects a balance between an expectation of strong cash flow from the Twilight franchise and consequent debt reduction over the next few years, and an increase in risk over time with greater dependence on new film production which is not sequel-based… Nevertheless, we remain cautious about the sustainability of strong credit metrics beyond 2013, given the end of the Twilight franchise, uncertainty about a replacement franchise, and the volatile nature of the company’s business.”
Here’s the Moody’s rating info:
Rating Action: Moody’s Assigns B1 rating to Summit Entertainment, LLC’s CFR and New Bank Debt
Global Credit Research – 19 Jan 2011
Approximately $800 million of debt affected
New York, January 19, 2011 — Moody’s Investors Service assigned a B1 Corporate Family Rating (CFR), a B2 Probability-of-Default Rating (PDR) and a stable outlook to Summit Entertainment, LLC (“Summit”). Additionally, Moody’s assigned a B1 rating to Summit’s proposed $600 million, 7-year senior secured term loan and $200 million, 5-year senior secured revolving credit facility. Proceeds from the new bank facility will be used to retire all existing indebtedness (not including non-recourse debt), to pay transaction costs, and for working capital needs and general corporate purposes including funding new film production and distribution costs, and a special distribution to its members. This is the first time Moody’s has assigned public ratings to Summit. The ratings are contingent upon final terms of the credit agreement.
Issuer: Summit Entertainment, LLC
Corporate Family Rating — B1
Probability of Default Rating — B2
Senior Secured Revolving Credit Facility — B1 (LGD 3-37%)
Senior Secured Term Loan B — B1 (LGD 3-37%)
The rating outlook is stable.
Summit’s B1 CFR reflects the inherent high risk associated with the film business and the company’s dependence on new film production, recognizing its modest library portfolio size. This is partially mitigated by the success of the Twilight franchise and significant expected near term cash flows from the last two sequels in the series over the next three years. Moody’s anticipates that over the next seven years while the debt is outstanding, Summit will have good credit metrics including moderate debt-to-EBITDA leverage of around 2.75x on average, which is expected to start around 4.5x in 2011 and decline until 2013 through debt reduction resulting from Twilight profits and strong excess cash flow sweep provisions in the credit agreement. Nevertheless, we remain cautious about the sustainability of strong credit metrics beyond 2013, given the end of the Twilight franchise, uncertainty about a replacement franchise and the volatile nature of the company’s business which we believe may well drive leverage again to above 4.0x in 2014 due to declining EBITDA. Moody’s notes that expectation of significant debt pay down through 2013 and minimizing refinance risk is key to the B1 rating.
The B2 PDR is a notch lower than the company’s CFR due to the company’s all bank capital structure with financial covenants resulting in a higher probability of default and a higher expected family recovery rate of 65%.
The stable outlook reflects a balance between an expectation of strong cash flow from the Twilight franchise and consequent debt reduction over the next few years, and an increase in risk over time with greater dependence on new film production which is not sequel-based. We are forecasting debt-to-EBITDA leverage (on a cash basis) to be around 4.5x in 2011, declining to under 2.0x by 2013 and ramping up again to over 4.0x in 2014, with average leverage around 2.75x over the term of the loan.
A rating upgrade is unlikely in the near term based on the company’s relatively short history, small portfolio size and low visibility on the revenues in later years which bear higher risk. However, if the company pays down debt at a more rapid pace due to better than expected and consistent performance of new films and total leverage falls and we believe can be sustained at under 2.0x by the end of 2014 along with credit protections remaining in place, upward pressure on the rating could occur.
A rating downgrade could occur if revenue and EBITDA are significantly below expectations and the company is not on the projected pace for debt reduction resulting in total leverage which is materially higher than our initial expectation of under 2.0x by the end of 2013 and a 2.75x average over the next seven years.
The principal methodology used in the instrument rating was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Summit’s ratings were assigned by evaluating factors that Moody’s considers relevant to the credit profile of the issuer, such as the company’s (i) business risk and competitive position compared with others within the industry; (iii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management’s track record and tolerance for risk. Moody’s compared these attributes against other issuers both within and outside Summit’s core industry and believes Summit’s ratings are comparable to those of other issuers with similar credit risk.
Summit Entertainment LLC, with its headquarters in Santa Monica, California, is an independent film studio which started in April 2007 and is privately owned by management and a group of financial and strategic investors. The company is engaged in the development, financing, production and distribution of motion picture films for theatrical, home entertainment, television and ancillary markets, and its predecessor was a leading foreign distributor and co-producer of films since 1993. Summit is best known for its production and distribution of the very successful Twilight film franchise.
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