MGM Creditworthiness Gets a Boost From Major Ratings Agency

Warner Bros.
"The Hobbit: The Desolation of Smaug"

The privately held company's rating rises to a B+ from a B, but the agency cautions that pure-play movie companies still carry risk because of the volatility of the business.

On the heels of MGM Holdings' robust second-quarter results announced last week, the S&P ratings agency has boosted the company’s credit rating to a B+ from a B, noting that they believe “the outlook is stable” for the movie company.

“The stable outlook reflects our expectation that leverage will remain moderate for a pure-play film studio over the next 12 months,” S&P said in an announcement, “despite inherent volatility in the film business.”

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Being a pure-play movie and TV business is still a problem for the big rating agency. It also says it regards MGM’s business profile as “weak” because of the risk associated with being dependent on two movie franchises: James Bond and The Hobbit.

“MGM faces the risk of losses and write-downs on new releases in 2013 and beyond as it pursues a steady state of production and cash flow,” warns S&P. “We regard the company's financial risk profile as 'significant' because of its historically heavy debt burden, despite the steep debt reduction after its emergence from bankruptcy in late 2010.”

The ratings agency did praise MGM under CEO Gary Barber for lowering corporate debt since emerging from bankruptcy in 2010. S&P also noted cash flow has increased greatly and, thanks to The Hobbit and James Bond, it is likely to stay strong for the next year at least.

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S&P also gave MGM praise for its large film and TV library, which spins off significant revenues. However, the ratings agency reiterated that MGM will need to continue to develop new titles “given the unpredictability of success in the industry.”

An improved credit rating can make it easier and less expensive for MGM to borrow money and can help provide creditability if it wants to pursue acquisitions. It will also be helpful if MGM should decide to purse a public stock offering -- although for now that idea seems to be on the back burner.