Rating Action: Moody's affirms NAI Entertainment's B3 CFR and revises outlook to positive amid cinema industry's continuing recoveryGlobal Credit Research - 02 Feb 2022Approximately $258 million of rated debt impactedNew York, February 02, 2022 -- Moody's Investors Service ("Moody's") has affirmed NAI Entertainment Holdings LLC's ("NAIEH" or the "company") B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR) and B3 rating on the $257.5 million outstanding senior secured term loan facility. The outlook was revised to positive from negative.Following is a summary of today's rating action:Affirmations:..Issuer: NAI Entertainment Holdings LLCCorporate Family Rating, Affirmed at B3Probability of Default Rating, Affirmed at B3-PD$300 Million ($257.5 Million outstanding) Senior Secured Term Loan B due 2025, Affirmed at B3 (LGD3)Outlook Actions:..Issuer: NAI Entertainment Holdings LLCOutlook, Changed to Positive from NegativeRATINGS RATIONALEThe affirmation of the B3 CFR reflects Moody's expectation for continuing improvement in NAIEH's operating performance and liquidity amid growing attendance levels at the global box office combined with our expectation for a strong movie slate in 2022. This will be supported by the planned release of numerous blockbuster and franchise titles as well as Moody's belief that most of the big studios will adhere to the new 45-day theatrical window for major film releases before distribution to video-on-demand (VOD) streaming platforms. Moody's expects the domestic cinema industry will achieve $7.75 - $9 billion in ticket sales this year.The positive outlook reflects Moody's view that strong pent-up moviegoer demand combined with the upcoming robust movie release schedule and sustained economic expansion will continue to produce increased out-of-home mobility and support organic revenue growth and expanding positive EBITDA and cash flows over the course of the year. Moody's projects US GDP will increase 4.4% in 2022 (4.4% globally) and 2.8% in 2023 (3.2% globally). The outlook also considers that NAIEH will continue to effectively manage operating expenses, which will support profit expansion. Moody's projects NAIEH's total debt to EBITDA will approach the 5.5x-6x area (including NAIEH's dividend income) or 6.5x-7x (excluding the dividend income) and positive FCF to debt will be in the 1%-2% range by year end 2022 (all metrics are Moody's adjusted). While the impact of higher inflation in the economy could pressure margins and moderate revenue growth to some extent due to rising operating expenses and a pullback in consumer spending, Moody's recognizes that the average cost for movie tickets remains one of the most inexpensive forms of out-of-home entertainment.All of NAIEH's global theatres are currently open. Over the course of 2021, moviegoer attendance gradually improved sequentially (quarter-over-quarter) as a growing percentage of the population received vaccinations against the virus, theatres reopened and resumed operations, government capacity restrictions were eased and lifted, and studios released more new films to theatres, especially major blockbusters during the year end holiday season that led to strong results in Q4 2021. While the domestic box office delivered only $4.5 billion of gross receipts last year, equivalent to around 39% of 2019's ticket sales, during December 2021 box office receipts were 80% of December 2019's receipts, with the last week of December 2021 generating receipts equivalent to 93% of December 2019's final week sales. December 2021's results were driven by strong moviegoer turnout (domestically and globally) for Sony's super-hero action movie Spider-Man: No Way Home and represents a marked improvement from Q1 2021 when domestic receipts were only 10% of Q1 2019's ticket sales.Given the structural challenges in the cinema industry, changes in consumer movie viewing preferences and increasing number of first-run movies distributed to competing streaming platforms, Moody's does not expect domestic box office receipts in 2022 to return to the industry's high watermark of $11 - $12 billion/annum. However, due to the strong movie slate expected this year, which includes several franchise titles across film genres that generally perform well at the box office (e.g., family-oriented, adaptation, adventure, comic book/super-hero and supernatural), Moody's believes domestic ticket sales can potentially reach $7.75 - $9 billion. The forecast considers the strong box office momentum witnessed in Q4 2021 that should continue into this year. The industry will return to its historical seasonality with the majority of annual revenue generated during the April to early September box office season. There is strong pent-up demand for moviegoing, especially with new blockbuster films expected to debut in 2022, which should enable NAIEH to return to positive EBITDA and operating cash flows.With NAIEH's theatres open, more new films released and a growing number of patrons returning to the cinema, the studios will likely observe the 45-day theatrical window exclusivity for big-budget film releases. The pandemic accelerated the compression of the theatrical window from the previous 60-75 days as a result of mandated theatre closures and strong subscriber growth on studios' streaming platforms. Last year, Warner Bros.' Warner Media subsidiary decided to release its entire slate of 17 films simultaneously in theatres and on its HBO Max streaming platform in the US. This year, WarnerMedia plans to revert to the exclusivity window, a credit positive. Moody's expects Universal, Paramount and Sony will also adhere to the theatrical window. However, the wildcard is Disney, which intends to decide theatrical exclusivity on a case-by-case basis. Disney's films typically represent 35%-40% of total domestic annual movie release volume. The potential exists for Disney to increasingly segregate its film content by producing certain movies specifically designated for its Disney+ streaming platform and other films designated for theatrical release.NAIEH's B3 CFR is supported by the company's weak, albeit improving, operating and financial performance, which suffered from pandemic-induced revenue and operating losses in 2020 and 2021, and delayed recovery when economies reopened. All of the company's global theatres are currently open. While Moody's expects improvement in NAIEH's operating performance, uncertainty exists surrounding Disney's adherence to the theatrical window and rising inflation concerns that could dampen moviegoer demand. Moody's forecasts NAIEH will generate positive, albeit weak, EBITDA and FCF (Moody's adjusted) in 2022. The rating considers NAIEH's substantial debt over-collateralization resulting from the company's pledged ViacomCBS shares that are currently valued at approximately 2x the senior secured bank debt. The cash flow boost from the $5.4 million quarterly dividend income that NAIEH receives from its pledged and unpledged ViacomCBS shares enhances liquidity, a credit positive.Conversely, the rating captures: (i) the cinema industry's excess screen capacity in North America, which will eventually require reduction; (ii) comparatively lower moviegoer demand as studios simultaneously release some films online via SVOD/PVOD or release them downstream in a shortened theatrical window; (iii) lower theatrical release volumes relative to historical levels; (iv) reduced show times compared to pre-pandemic periods; and (v) the impact from some cost-conscious consumers reducing their out-of-home entertainment and number of trips to the cinema amid affordable subscription-based VOD movie viewing. The rating also considers NAIEH's elevated financial leverage, which Moody's expects to decrease to the 5.5x-6x range (Moody's adjusted, including the dividend income) over the rating horizon.Moody's expects NAIEH to maintain good liquidity over the coming 12-15 months, supported by positive FCF generation that we project to be in the $5 - $10 million range in 2022, sufficient cash balances (at 30 September 2021 cash totaled $9 million, of which $7.3 million resides at NAIEH), annual dividend income of $22 million from its ViacomCBS shares and access to the recently amended $100 million senior secured revolving credit facility (RCF) maturing November 2022 at the parent, NAI. Over the past 18 months, NAIEH was able to enhance its liquidity position via alternate liquidity sources that included: settlement of interest rate and currency hedges, net asset sales, government assistance from the UK related to payroll and benefits subsidies and an alternative minimum tax refund.The $257.5 million outstanding term loan, which is secured to 15.4 million shares of ViacomCBS stock currently valued at approximately $523 million (pretax), is not subject to any financial maintenance covenants. NAIEH benefits from a long-dated capital structure given that the term loan matures in 2025. NAIEH has substantial alternate liquidity via the ownership of 7.2 million unpledged shares of ViacomCBS stock currently valued at approximately $258 million (pre-tax, as of 1 February 2022). Also, the company owns a relatively high proportion of its theatres in the US and UK (approximately 62%), of which most are unpledged and have good market value. Across NAIEH's global theatre circuit, about 35% of its theatres are owned. While selling these assets would lower NAIEH's earnings and cash flow, they are monetizable. Combined, the company's stock and theatre assets would easily cover all of the mandatory payments and outstanding debt.STRUCTURAL CONSIDERATIONSThe B3 rating on the senior secured term loan is one notch lower than the outcome from our Loss Given Default (LGD) model to reflect the continued operating challenges facing the company, elevated leverage and lack of financial covenants. The rating also reflects the instrument's priority position in NAIEH's capital structure versus unsecured non-debt obligations.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if NAIEH experiences positive growth in box office attendance, stable-to-improving market share, positive and expanding EBITDA with margins approaching pre-pandemic levels and enhanced liquidity; and exhibits prudent financial policies that translate into an improved credit profile. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA was sustained below 6x (Moody's adjusted, including the ViacomCBS dividend income), or below 7.5x (excluding the dividend income), and free cash flow as a percentage of total debt improved to above 1.5% (Moody's adjusted).Ratings could be downgraded if there was: (i) an exhaustion of the company's liquidity or an inability to access additional sources of liquidity to cover cash outlays; (ii) poor execution on reducing or managing operating expenses; or (iii) limited prospects for operating performance recovery in 2022. A downgrade could also be considered if Moody's expects total debt to EBITDA to remain above 7x (Moody's adjusted, including the ViacomCBS dividend income), or above 8.5x (excluding the dividend income), or free cash flow to remain negative on a sustained basis.Headquartered in Norwood, Massachusetts, NAI Entertainment Holdings LLC is a wholly-owned subsidiary of National Amusements Inc., a private media holding company 100% owned and controlled by the Redstone family, and operates a significant proportion of NAI's cinema assets through its 17 theatres operating in the US and 49 theatres operating internationally (18 in the UK and 31 in Latin America). NAIEH also holds approximately 22.6 million of ViacomCBS shares (15.4 million pledged and 7.2 million unpledged). Revenue totaled approximately $97 million for the twelve months ended 30 September 2021.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Gregory A. Fraser, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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