OREANDA-NEWS. S&P Global Ratings said today that it assigned its 'B' corporate credit rating to Redbox Automated Retail LLC. The rating outlook is stable.

At the same time, we assigned our 'B+' issue-level rating and '2' recovery rating to the Redwood Merger Sub Inc.'s proposed $440 million first-lien secured credit facilities. The '2' recovery rating indicates our expectation for substantial (70%-90%; upper half of the range) recovery of principal for lenders in the event of a payment default. The credit facilities consist of a $40 million revolving credit facility due 2021 and a $400 million term loan due 2021. Redbox will be the borrower after the transaction closes.

"Our 'B' corporate credit rating on Redbox reflects our expectation for meaningful revenue declines over next several years, which more than offset the company's strong market share in DVD rentals, wide U. S. geographic coverage, good profitability, and healthy discretionary cash flow," said S&P Global Ratings' credit analyst Andy Liu. Redbox is facing unfavorable secular trends stemming from a proliferation of video viewing alternatives such as video on demand (VOD), transaction-video-on-demand (TVOD), and subscriber-video-on-demand (SVOD), as well as greater competition for leisure time. We believe that unfavorable secular trends are unlikely to reverse and could actually worsen with SVOD providers Amazon Prime, Hulu, Netflix, and other cable channels increasing their investments in original programming and expanding the ways that their subscribers could access their content. These are also key factors behind our assessment of Redbox's business risk profile as weak.

The stable rating outlook is based on our expectation that Redbox will generate good discretionary cash flow over the next several years and apply a meaningful portion of that cash flow toward repaying its debt, while maintaining good cost control that should enable it to persist despite unfavorable secular trends its business faces.

We could lower our corporate credit rating on Redbox if unfavorable secular trends worsen, causing the company's revenue to decline well in excess of our estimate of a low-teen percentage decline. Additionally, we could lower the rating if Redbox's adjusted debt leverage exceeds 2x or if its financial covenant compliance headroom declines to less than 15%.

We view the probability of an upgrade as low. We could raise the rating if unfavorable secular trends diminish significantly such that the company is able to stabilize its revenues or experience low rate of revenue decline (low-single-digit percentage), while maintaining its current EBITDA margin and its adjusted debt leverage in the 1.5x-2x range.