Moody's affirms Kerasotes

Moody's Investors Service said it affirmed the B2 corporate family rating and B1 senior secured bank rating of Kerasotes Showplace Theaters LLC following the close of another sale leaseback transaction, the company's third such transaction since late 2005. Moody's also said it changed the enterprise wide recovery assumption to 50% from 65%, reflecting expectations for lower recovery due to the continued sale leaseback transactions, and raised the probability of default rating to B2 from B3 and lowered the loss given default assessment on the secured bank debt to LGD3, 37% from LGD2, 29%.

The outlook is stable.

The affirmation and stable outlook assume that the company's debt-to-EBITDA will remain in the high 5x to low 6x range, Moody's said, and that operating cash flow will continue to cover maintenance capital expenditures over the next several years.

Moody's said it does not expect Kerasotes to become free cash flow positive until capital expenditures moderate after 2009, but its $75 million revolving credit facility (slightly less than $10 million outstanding currently) provides adequate liquidity for this expansion.

The ratings continue to reflect high financial risk, sensitivity to product from movie studios, lack of scale, weak industry growth profile and concerns that the company's aggressive expansion will not yield desired returns, the agency said.

Attractive concession margins, strong competitive position in targeted smaller markets and an improving asset base support the rating, Moody's said.

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