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Lions Gate Capital Holdings LLC -- Moody's assigns B3 to Lions Gate's proposed bond offering

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Rating Action: Moody's assigns B3 to Lions Gate's proposed bond offeringGlobal Credit Research - 23 Mar 2021New York, March 23, 2021 -- Moody's Investors Service ("Moody's") assigned a B3 rating to Lions Gate Entertainment Corp's (Lionsgate) wholly owned US subsidiary, Lions Gate Capital Holdings LLC's (Lionsgate Capital) offering of $1.0 billion senior unsecured notes due 2029. Proceeds will be used to redeem the existing senior unsecured notes ($546 million and $519 million both due 2024). Since the transaction is largely leverage-neutral and there is no material change in the company's capital structure, Lionsgate's B1 CFR, its SGL-2 Speculative Grade Liquidity rating and Lionsgate Capital's existing security ratings are unaffected. Lionsgate's rating outlook remains stable.Assignments:..Issuer: Lions Gate Capital Holdings LLC....Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD5)RATINGS RATIONALELions Gate Entertainment Corp.'s ("Lionsgate") B1 CFR reflects the company's position as a global content leader among motion picture and television studios with its Starz premium pay TV network and a growing global direct-to consumer television platform, its film and television production and distribution businesses, and its large library of nearly 17,000 motion picture titles and television programs. It also reflects high Moody's adjusted leverage of 5.9x (7.9x cash leverage) with an expectation that leverage will increase further during the upcoming fiscal year due to lingering economic disruptions in the motion picture industry caused by the Covid-19 pandemic as well as the company's planned increase in content spending to support the expansion of its Starz platform internationally.Following the increase in debt due to the company's acquisition of Starz, LLC ("Starz") in December 2016 and settling of the Starz acquisition dissenter equity claims in early 2019, along with investments in Starz International, leverage became elevated. We believe Lionsgate will be positioned to accelerate its focus on further reducing its leverage once Starz International becomes cash positive, which we expect by the end of fiscal 2023. The credit profile reflects the strength and diversity of the company's segments but is constrained by the volatility and exposure that remains in the film business.The company has performed better than expected this year during the Covid-19 pandemic as it has benefited from strong library content demand and is becoming in effect an "arms dealer" to the multitude of streaming platforms. Starz OTT subscription growth also outperformed and helped mitigate declines in linear revenues as the company transitions from fixed pay network packages to a carte. Also, the company has been adapting and increasing its cost control efforts in the current environment and we expect leverage will improve to under 5x by fiscal 2023 or sooner if the company raises equity, as it has publicly contemplated, against specific assets that include its international Starz business, in order to reduce debt more quickly. The expiration of the Starz fixed rate bundled premium Pay TV carriage deal with Comcast was a recurring revenue loss, but we believe the company will be successful in continuing to mitigate the decrease in future revenues as it transitions its Starz revenue composition more towards an a la carte model with Comcast and more importantly, grows its international direct to consumer business.With regards to our ESG framework, environmental and social risks are usually not a key credit factor for companies in the motion picture business. However, with the recent spread of the coronavirus and subsequent movie theater closures across the country, we view this as a social risk and expect it to create delays in film releases and revenues until the threat of the spread has subsided. On the other hand, the company has had success with recent film releases using PVOD and other hybrid distribution models. Other social risks for Lions Gate can include the event of a data breach, where intellectual property and other internal types of sensitive records could be subject to legal or reputational issues. However, management monitors its social risks closely, including data protection, and workforce resource planning. Lions Gate Entertainment Corp. is a public company with a financial policy that allows for elevated leverage in periods of content investment. Lions Gate's leverage profile is higher than that of most other media companies at the B1 rating level and its willingness to operate with higher leverage represents an aggressive financial policy. However, we believe that the company intends to reduce leverage and sustain it under 4.0x (with Moody's adjustments) over the long-term. The company does not have financial flexibility for debt financed acquisitions or shareholder returns within its B1 rating as long as leverage remains elevated.The SGL-2 rating reflects our expectation that the company will generate low, but positive cash flows during the next 12 months as it experiences continuing disruptions due to Covid-19 and increases its content spend in connection with the expansion of Starz. As of December 31, 2020, the company had approximately $550 million of cash on its balance sheet. We expect FCF to decline from our estimate of around $125 - 150 million in fiscal year 2021 to around $50 - $100 million in fiscal year 2022 due to increased costs for film and TV production. Use of excess cash on the balance sheet to further reduce either senior secured or senior unsecured debt to improve leverage metrics would be generally viewed as credit positive. Absent any change to the CFR, a material reduction of solely the unsecured debt could result in ratings pressure on the senior secured instruments due to less junior debt loss absorption. However, if a similar amount of senior secured debt is repaid, instrument ratings would likely remain unchanged. The company's liquidity profile is supported by a sizeable revolver with a capacity of $1.5 billion, which is currently undrawn. We anticipate that Lionsgate may occasionally rely on its revolver in interim periods to fund film/television production costs. The new credit facility has slightly relaxed its financial covenants from a 4.5x net first lien leverage covenant to 4.75x and 2.5x interest coverage covenant to 2.25x. We expect Lionsgate will remain in compliance under both covenants over the next twelve months.The stable outlook reflects our expectation that the company will improve operating performance as the negative effects from the coronavirus subsides and the motion picture business improves, and it will apply its free cash flows and any potential non-core asset sale proceeds towards debt repayment to reduce leverage. As of the last twelve months ended December 31, 2020, Debt-to-EBITDA leverage remains high for the B1 CFR but we expect that it will improve back to under 5.0x towards over the next two years which will position the company more in line with the B1 corporate family rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGAs the company's rating is expected to be weakly positioned through fiscal 2021, an upgrade is unlikely in the near term. The ratings could be upgraded if management commits to more conservative financial policies and leverage is sustained comfortably under 4.0x. The ratings could be downgraded if our expectation of the company's ability or commitment towards debt reduction dissipates such that leverage is expected to be sustained over 5.0x (with Moody's standard adjustments). The rating could also be downgraded if the company's liquidity position comes under pressure, or cash flow generation does not improve following the company's increased period of content spending and marketing to expand its Starz footprint.Lionsgate, domiciled in British Columbia, Canada (with its headquarters in Santa Monica, CA), is a vertically integrated next generation global content leader with a diversified presence in motion picture production and distribution, television programming and syndication, premium pay television networks, home entertainment, global distribution and sales, interactive ventures and games and location-based entertainment. Annual revenues as of LTM 12/31/2020 were roughly $3.3 billion.The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Neil Begley Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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