OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'BB' corporate credit rating on California-based Metro-Goldwyn-Mayer Inc. (MGM). The rating outlook is stable.

At the same time, we assigned our 'BBB-' issue-level rating and '1' recovery rating to the company's $1 billion asset-based lending (ABL) revolving credit facility due 2021, which replaces the $665 million ABL revolving credit facility. The '1' recovery rating indicates our expectation for significant recovery (90%-100%) of principal in the event of a payment default.

We are also withdrawing our 'BB' issue-level rating and '3' recovery rating on the company's $300 million term loan, which was repaid in full on June 27, 2016.

"The rating affirmation is based on our expectation that MGM's adjusted debt leverage will remain below the low-2x area over the next 12-18 months and the company will continue to generate stable cash flows from its extensive library while maintaining adequate liquidity," said S&P Global Ratings' credit analyst Khaled Lahlo. The newly structured $1 billion ABL revolving credit facility replaces MGM's existing $665 million ABL revolving credit facility, and it lowers the company's borrowing rate to LIBOR plus 2.25% from LIBOR plus 2.75%. The company also prepaid its $300 million 5.125% second-lien term loan. As a result, we expect interest expense savings in excess of $10 million per year. Our corporate credit rating on MGM also reflects the company's weak business risk profile and intermediate financial risk profile assessments.

"The stable rating outlook on MGM reflects our expectation that the company will maintain adjusted leverage below the low-2x area on a sustained basis," said Mr. Lahlo. "We also expect that MGM's operating cash flow will remain volatile due to film spending, but the company will likely generate stable cash flow of at least $250 million annually by monetizing its film library and from its franchise film releases and earnings from its UAMG acquisition."

We could lower our corporate credit rating on MGM if the company's future film releases underperform our expectations; if its production strategy shifts to include full financing for a larger, more expensive film slate; or if its financial policy shifts to include large debt-financed acquisitions or increased shareholder rewards, such that adjusted leverage increases and remains consistently above the low-2x area; and if its liquidity position becomes pressured.

Although unlikely during the next two years, we could raise the rating if MGM significantly broadens its business through further expansion into TV production or the development of more solid and dependable film franchises, both of which could reduce cash flow volatility such that we would revise our assessment of the company's business risk profile to fair.