Lionsgate Looks to Refinance Debt, Lower Costs

2:15 PM PST 07/12/2012 by Alex Ben Block
Lionsgate

Studio nabs lower interest rates to reduce debt load and costs after box office wins for "Hunger Games," "Twilight."

Lionsgate plans to replace its current $360 million revolving credit line with a significantly larger one of up to  $750 million – which would make it one of the largest entertainment industry banking transactions of all time.

However, that is only one part of the mini-major’s larger strategy to lower debt costs and deleverage in the wake of the Summit acquisition, strong growth in television and most of all the success and future prospects for the Twilight and Hunger Games movie franchises.

This strategy is also helped by Lionsgate’s stock price, a hefty $14.39 per share as of Thursday morning – up about 70 percent in a year - and the fact interest rates are relatively low.

“They are in a much stronger position post the Summit acquisition,” says Marla Backer, analyst for Hudson Square Research. “That means they are going to pay much more attractive financing terms. We’ve also seen that their cash flow generation will be significantly stronger so they can support an expanded revolver on their balance sheet, especially since I think given their different profile now they will be able to negotiate better terms.”

A Lionsgate corporate spokesman declined comment but the company is expected to begin meeting with major entertainment banks as soon as next week to test the market and the level of interest in supporting their larger ambitions.  They could end up with a new revolving credit line of anywhere from $600 million to $750 million.

Lionsgate has not yet identified a lead bank for the transaction but longtime banking partner JP Morgan is said to have the inside track. Other banks they will meet with in these early stages include Wells Fargo, Royal Bank of Canada and Bank of America. A deal of this size is likely to require the participation of most of the banks that do entertainment lending. Typically this means the top banks would commit before the offer goes live to $75-$100 million each; so Lionsgate would have half or more of the money it wants even before it goes to market.

Because August is a slow month for many banks, it's likely they will be ready for the next stage in September, which would lead to a wider syndication that could wrap up by October or November.

There have been other recent transactions involving Legendary and Regency among others that included up to $500 million in bank debt, but beyond that most turned to large institutional investors for additional funds. Sources say that Lionsgate hopes to do the entire refinancing with bank because it would save it both costs and work.

The banks can just make the deal but to seek institutional funding would require Lionsgate to get a rating from the ratings agencies -  who tend to discount even the best entertainment companies because of historically uneven performance – and do a road show to meet potential investors which would add time and expense.  Institutions also will not provide a revolving line of credit like the banks (which can be drawn on as needed), providing maximum flexibility.

Lionsgate currently is in the fourth year of a five year revolving line of credit that gives them borrowing power up to about $340 million. As of the end of last year, they had borrowed about $100 million against it. That revolver expires in July 2013, so it is normal for them to begin to look at replacing it.

In the past year Lionsgate has completely changed its profile and is now seen as a much more important player in Hollywood and a better bet on Wall Street.

It's not hard to see why. Its revenue in the fourth quarter of the fiscal year ended March 31 was up 71 percent compared to a year earlier mostly because of Hunger Games which has grossed about $654 million worldwide to date (of which $404 million is from North America). The company still had a loss of $22.7 million on quarterly revenue of $645 million, but it had greatly improved cash flow. There is also the prospect of the results form the final Twilight movie this November and three Hunger Games sequels in the coming years.

In addition, there is a sense the TV show Anger Management will be a global success for them; and that the TV division with other shows like Mad Men and Boss is doing well. They also get strong results from the library of over 4,000 movies and TV shows.

“They have very high cash flow so the risk reward ratio for Lionsgate has improved dramatically over the past year,” says Backer.

They have been using that increased cash flow to lower their debt and costs already. On June 5, Lionsgate redeemed about $21 million of a convertible senior subordinated debt with an interest rate of $3.6 percent that was due in 2025.  The holders of the debt have the choice of taking cash or converting to stock, which at the current level is probably the best choice.

They have also reduced the $500 million term loan from the Summit acquisition by about $200 million well in advance of when it is due in a little more than two years.

The real goal here may be to eliminate about $436 million in debt that is costing them just over 10 percent in interest charges. They could lower that cost to as little as 3 or 4 percent, saving millions in annual charges.

Once they complete the integration of Summit, lower their debt and as they increase their cash flow, Lionsgate is likely to again seek acquisitions. That is how they have grown the company over the years.

“The movie business is tricky,” says Backer. “It’s a hit or miss business. But what I like, and a lot of people like about Lionsgate, is that they take a risk mitigation approach to almost everything that they do, and now they have a proven franchise portfolio. That’s really coming through in the stock price.”

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