S&P Upgrades Lionsgate (LGF) to 'BB-'; Sees Improving Revenue, Cash Flow Visibility

Standard & Poor's Ratings Services said today that it raised its ratings on Santa Monica, Calif.-based Lions Gate Entertainment Corp. (NYSE: LGF), including the corporate credit rating, to 'BB-' from 'B+'. The outlook is stable.

"The upgrades reflect our expectations that Lions Gate revenue and cash flow visibility will improve over the next two years," said Standard & Poor's credit analyst Naveen Sarma. "We believe that Lions Gate's strategy of focusing on selected larger budget film franchises and moderate cost films, while preselling certain rights to reduce the financial risk to the company, improves visibility into its future earnings."

The stable outlook reflects our expectations that the company will broaden its cash flow base by firmly establishing new film franchises, expanding its film library cash flow, and growing its TV production segment profitably--all of which could reduce earnings volatility. As a result, we expect that discretionary cash flow to debt (including production loans) will remain above 20% through fiscal 2016. We expect quarterly earnings and cash flow to still fluctuate widely, depending on the timing and success of new releases. Although the outlook is stable, we consider a downgrade more likely than an upgrade over the next few years.

We could lower the rating if the company deviates from its current strategy of focusing on moderate-cost films and selected franchise films. A shift that involves higher average cost films or a higher annual output with fewer franchise films could result in more earnings and cash flow volatility. Additionally, a significant debt-financed acquisition that we conclude will push discretionary cash flow to debt (including production loans) below 20%, with no prospects for returning above 20%, could result in a downgrade. Increases in shareholder-favoring actions that also push discretionary cash flow to debt (including production loans) below 20% could result in a downgrade.

We consider an upgrade as highly unlikely during the next two years. We could raise the rating if the company significantly reduces its cash flow volatility. This could involve developing new film franchises that register box office success following the conclusion of the current franchises, ensuring healthy ongoing EBITDA and positive discretionary cash flow. Profitable growth of the TV production segment, which could reduce earnings volatility and improve margins, would likely be an important contributor to an upgrade scenario.

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