S&P: Lions Gate Entertainment Corp. Rating Lowered To 'B+' And Removed From CreditWatch; Outlook Stable; New Debt Rated
We also assigned our 'BB-' issue-level rating and '2' recovery rating to the company's proposed senior secured debt, which consists of a $1 billion revolving credit facility due 2021, a $1 billion term loan A due 2021, and a $1.9 billion term loan B due 2023. The '2' recovery rating indicates our expectation for substantial recovery (70%-90%; upper half of the range) of principal for debtholders in the event of a payment default.
We expect to withdraw our ratings on the company's existing second-lien term loan and 5.25% senior secured notes when the transaction closes.
"The downgrade is based on our expectation that Lions Gate's adjusted leverage, pro forma for its proposed acquisition of Starz LLC, will remain elevated, at above 5x over the next 12-18 months," said S&P Global Ratings credit analyst Khaled Lahlo.
We expect that the proposed debt financing will add about $2 billion of incremental debt to the company's balance sheet, which will result in pro forma adjusted leverage, as of June 30, 2016 (including production loans and 25% surplus cash haircut) of about 9.7x. We also expect adjusted leverage to decline to the low-5x area by the end of the fiscal year ending March 31, 2018, due to more stable cash flow generation from Starz and Lions Gate's TV production segment; and for Lions Gate to achieve significant cost savings, primarily in terms of tax savings. In addition, the company has stated that it will not pay any dividends or share repurchases while it focuses on substantial deleveraging during the next 12-18 months.
The stable rating outlook reflects our expectation that Lions Gate's leverage will remain elevated but gradually decline to about 5x over the next 12-18 months due to EBITDA growth and the company's commitment to voluntarily repay debt. The outlook also reflects revenue and cash flow stability from Starz's cable networks offset the inherent volatility of the company's motion picture segment.