Citing ‘Hunger Games,’ Moody’s Upgrades Lionsgate

Moody’s Investors Service has upgraded its debt rating on Lionsgate to Ba3 from B1 due to the expected strong performance of the next three “Hunger Games” movies.

The rating service also upgraded its probability of default rating to Ba3 from B1. The move, announced Thursday after the market closed, came a week after Standard and Poors issued a similar upgrade.

Moody’s said the upgrades reflected Lionsgate’s increased financial flexibility over the next three years and its belief that it has the capacity and willingness to sustain such flexibility in the longer term.

“We believe the company has highly visible and significant free cash flows of well over $150 million per year through fiscal 2016, driven by the high probability of success of the remaining three films in the ‘Hunger Games’ series, as well as significant contracted revenues (including those from foreign output deals and television licensing deals) which are reflected in its backlog of $1.1 billion at 3/31/13,” it said.

Moody’s noted that last year’s acquisition of Summit Entertainment led to “greater scale and substantial strategic and cost synergies” and helped bring down the debt-to-EBITDA leverage. It also expressed confidence that Lionsgate could develop film franchises beyond “Hunger Games” — an example being “Divergent,” which opens in March.

“The Hunger Games: Catching Fire,” starring Jennifer Lawrence, opens Nov. 22. The first “Hunger Games” was a success, earning nearly $700 million last year.

“We believe that the company is in the process of developing films with franchise potential, though their success remains uncertain, and the inclusion of ‘Twilight’ and ‘Hunger Games’ franchises in its film library will provide a tail of cash flows for some time to come,” Moody’s added.

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