If you work at Stereo D, Method Studios, Encore Hollywood, or Iloura (list updated per comments below) you may have been aware about some recent news concerning parent company Deluxe Entertainment’s credit rating being downgraded by Standard & Poors:
The $605 million of loans to Deluxe Entertainment Services Group Inc., which Perelman controls through his MacAndrews & Forbes Holdings Inc., were quoted at 88 cents on the dollar Aug. 26, according to Markit. That compared with an average of about 98.3 cents for the broader market. Last week, Standard & Poor’s took the rare step of cutting Deluxe’s credit rating three steps, to a level that implies the production company is “currently vulnerable” to default.
In 2011 Deluxe made big news with some major acquisitions making it one of the largest global post production companies. Since then the company’s credit rating has continued to fluctuate. In February the company’s credit rating was upgraded after an injection of cash from a new loan (register to view). What makes this latest downgrade troubling according to Standard & Poors is that the current situation may lead to another injection of equity from Deluxe’s holding company (run by billionaire Ron Perelman) which could trigger more downgrades and riskier loans:
We view the company’s financial risk profile as “highly leveraged,” reflecting the company’s high leverage and high capital expenditures. Given the operational underperformance, we expect the company to generate negative discretionary cash flow in excess of $25 million in 2014 and 2015. As a result, it has minimal flexibility to ease pressure on its covenant compliance. The company’s private equity shareholder, MacAndrews & Forbes, can provide an equity cure for a maximum of two of four trailing quarterly periods and no more than five fiscal quarters during the term of the agreement. We believe Deluxe’s covenant pressures may be ongoing, necessitating an equity cure potentially this September, absent a covenant amendment or recapitalization.
UPDATE: Method Studios President comments below