Lions Gate's liquidity is "adequate" over the next 12 to 18 months. Our assessment incorporates the following expectations, assumptions, and factors:
-- We expect sources of liquidity (including cash and unused revolving credit facility capacity) over the next 12 to 18 months to exceed uses by 1.2x or more.
-- We expect net sources will be positive, even if EBITDA is slightly negative over the next 12 months.
-- We expect Lions Gate to remain in compliance with the covenants under its credit agreement. Liquidity to finance film production is provided under separate facilities.
-- It has good relationships with its banks.
As of June 30, 2012, Lions Gate had $68 million of cash on hand and $41 million of availability under its $340 million revolving credit facility (maturing July 2013). Over the next 12-18 months, it has potential debt maturities of about $220 million of production loans, about $36 million outstanding under its Mandate film financing facility (maturing April 2013, and a $65 million Pennsylvania Regional Center secured loan due April 2013. We expect the production loans and the Mandate facility to be repaid with the revenues of the films financed under these facilities. We also expect discretionary cash flow (modestly negative for the 12 months ended June 30, 2012) to turn about $100 million positive in fiscal 2013. Lions Gate has minimal annual capital spending needs of about $4 million (assuming no additional advances to affiliates), and we assume it will not initiate a shareholder dividend.
The stable rating outlook reflects our view that Lions Gate's financial performance will be, on average, more profitable than in the past with the addition of the Summit film library and franchises, and retention of key Summit talent. We expect earnings and cash flow will still fluctuate widely, depending on the timing and success of new releases. We believe the chances of a downgrade or an upgrade are equally likely. We could lower our rating if the film slate underperforms at the box office, causing EBITDA and discretionary cash flow to remain minimal and straining liquidity in advance of upcoming debt maturities. Conversely, we could raise the rating if Lions Gate's film slate over the next one to two years exceeds our expectations, thereby improving liquidity through higher discretionary cash flow and enabling the company to pay down debt. A key consideration will be its progress in developing new film franchises that assure healthy ongoing EBITDA and positive discretionary cash flow.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008