S&P Raises Lionsgate Ent. (LGF) from 'B' to 'B+'; Outlook Stable
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Standard & Poor's Ratings Services today raised its ratings on Santa Monica, Calif.-based Lions Gate Entertainment Corp (NYSE: LGF), including the corporate credit rating to 'B+' from 'B'. The outlook is stable.
"The upgrade reflects the significant improvement in Lions Gate's credit metrics since it closed on the acquisition of Summit Entertainment in 2012," said Standard & Poor's credit analyst Naveen Sarma. Leverage improved to 4.3x as of March 31, 2013, from over 40x for the same period last year, pro forma for the repayment of the company's $65 million Pennsylvania loan. Our debt calculation includes $404 million in production loans. In addition, discretionary cash flow to debt has grown to 20% from a negative figure in 2012. We expect that the company will at least maintain current credit measures, and will likely modestly improve them over the next two years. We believe this improvement will stem from continued success of the Hunger Games franchise, growth in more predictable television production revenues, and a continuation in the company's strategy of giving up some film revenue upside to temper per film cost exposure.
The stable outlook reflects our view that discretionary cash flow to debt will remain above 20% through fiscal 2016 (ending March 31, 2016). The rating and outlook are predicated on the company continuing to develop and acquire additional successful film franchises and grow its TV production revenues. We expect quarterly earnings and cash flow to still fluctuate widely, depending on the timing and success of new releases. We view an upgrade as unlikely over the next few years.
We could lower our rating if the company were to deviate from its current strategy of focusing on moderate-cost films (along with selected franchise films). This could result in more earnings and cash flow volatility. Additionally, a significant debt-financed acquisition that pushes discretionary cash flow to debt below 20%, with no prospects for returning above 20%, could result in a downgrade. We would lower our ratings if the company were to initiate any shareholder-favoring actions.
We could consider an upgrade if the company broadens its ongoing base of cash flow. This includes 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, also could contribute to an upgrade scenario. The TV production segment would likely need to grow significantly to offer a meaningful cushion to feature film volatility.
"The upgrade reflects the significant improvement in Lions Gate's credit metrics since it closed on the acquisition of Summit Entertainment in 2012," said Standard & Poor's credit analyst Naveen Sarma. Leverage improved to 4.3x as of March 31, 2013, from over 40x for the same period last year, pro forma for the repayment of the company's $65 million Pennsylvania loan. Our debt calculation includes $404 million in production loans. In addition, discretionary cash flow to debt has grown to 20% from a negative figure in 2012. We expect that the company will at least maintain current credit measures, and will likely modestly improve them over the next two years. We believe this improvement will stem from continued success of the Hunger Games franchise, growth in more predictable television production revenues, and a continuation in the company's strategy of giving up some film revenue upside to temper per film cost exposure.
The stable outlook reflects our view that discretionary cash flow to debt will remain above 20% through fiscal 2016 (ending March 31, 2016). The rating and outlook are predicated on the company continuing to develop and acquire additional successful film franchises and grow its TV production revenues. We expect quarterly earnings and cash flow to still fluctuate widely, depending on the timing and success of new releases. We view an upgrade as unlikely over the next few years.
We could lower our rating if the company were to deviate from its current strategy of focusing on moderate-cost films (along with selected franchise films). This could result in more earnings and cash flow volatility. Additionally, a significant debt-financed acquisition that pushes discretionary cash flow to debt below 20%, with no prospects for returning above 20%, could result in a downgrade. We would lower our ratings if the company were to initiate any shareholder-favoring actions.
We could consider an upgrade if the company broadens its ongoing base of cash flow. This includes 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, also could contribute to an upgrade scenario. The TV production segment would likely need to grow significantly to offer a meaningful cushion to feature film volatility.
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