As it continues to plot a new course after a management reshuffling, MGM has received some unwelcome news this morning from Moody’s Investors Service. Noting the company’s increased spending on film and TV projects, it has downgraded two key ratings for the company.
MGM’s “corporate family rating” and default probability rating both took steps down, and Moody’s outlook changed to negative from stable. The corporate family rating is a measure of a company’s ability to honor its financial obligations.
In issuing the downgrades, Moody’s cited concerns on MGM’s expanded debt load. The company has increased its revolving credit facility to $1.6 billion from $1 billion, and the facility comes due in 2023, plus it has term loans of $400 million and $500 million due in 2025 and 2026.
“The higher leverage and change in financial policy is a departure from the company’s very conservative financial policies espoused by its departing CEO Gary Barber, who had led the company since it emerged from bankruptcy in 2010,” Moody’s wrote in a report. Barber was ousted unexpectedly in March, replaced by a team of executives.
“Prior to the company’s debt-financed acquisition of the Epix stake that it did not already own, debt was modest and free cash flows have been historically stable and strong,” the report said. “However, with the new upsized revolver, we expect the company to make significantly higher investments in content to ramp up more quickly original Epix series to expand its distribution and subscriber base.”
It went on: “We believe that the front-end spending on the company’s film (including the next James Bond film) and television slate are strategically beneficial, but financing the build up with all debt adds financial risk to business risks that are higher than average. We anticipate the buildup to negatively impact credit metrics through 2020. As a result, we anticipate that free cash flow will be negatively impacted through 2019 and debt reduction will not ramp back up until 2020 and 2021.”
While the Epix deal brings some upside, especially ways to integrate and exploit MGM library properties, Moody’s wrote, the debt that the acquisition required “adds much additional financial risk to the balance sheet.”
As the company’s rating is expected to be weakly positioned through 2019, an upgrade anytime soon is unlikely, Moody’s wrote.
A further downgrade could also be in the cards, “prompted by a radical or permanent shift towards even more aggressive financial policies or a stumble by MGM’s new and yet proven leadership team as a group.”