S&P Affrims Ratings on Lionsgate (LGF) Following Upsized Offering

Standard & Poor's Ratings Services said today that its 'BB-' issue-level rating and '4' recovery rating on Santa Monica, Calif.-based independent film studio Lions Gate Entertainment Corp.'s (NYSE: LGF) senior secured second-lien term facility due 2022 are unchanged following the company's announcement that it has upsized the facility to $375 million. The '4' recovery rating reflects our expectations for average recovery (30%-40%; low end of the range) of principal in the event of a payment default.

The company plans to use the net proceeds to fully repay the $225 million senior secured second lien-term loan due July 2020, to repay a portion of the outstanding borrowings under the existing senior revolving credit facility ($160.5 million outstanding as of Dec. 31, 2014), and for general corporate purposes.

The 'BB-' corporate credit rating on Lions Gate reflects our assessment of the company's business risk profile as "weak," based on our criteria. This assessment stems from the inherent volatility of the motion picture industry due to the high upfront costs, timing, and uncertain success of film releases.

Our assessment of Lions Gate's financial risk profile as "significant" reflects our expectations for discretionary cash flow to debt of more than 20% (including production loans) and leverage of 3x-4x over the next two years due to the Hunger Games and Divergent franchises' success and the company's risk mitigation strategy. Our assessment also reflects the cash flow volatility and formidable upfront cash requirements inherent in the film studio business. Leverage, pro forma for the proposed transaction and including production loans is about 4.1x, as of Dec. 31, 2014.

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