Sri Lanka’s EAP Films and Theatres rated BBB+ by RAM

Sept 09, 2013 (LBO) – Sri Lanka’s EAP Films and Theatres (Pvt) Ltd, a company which has a 60 percent share in local film exhibition market and owns and manages 45 theatres, has been rated BBB+ by RAM. The rating agency said the firm plans to sell 500 million rupees of listed senior secured debt.

The full statement is reproduced below:

RAM Ratings Lanka assigns BBB+/P2 corporate credit ratings to
EAP Films and Theaters (Pvt) Ltd

RAM Ratings Lanka has assigned respective long- and short-term corporate credit
ratings of BBB+ and P2 to EAP Films and Theatres (Pvt) Ltd (“EAPF” or “the
Company”). Concurrently, a long-term rating of BBB+ has been assigned to
EAPF’s proposed LKR 500 million Listed Senior Secured Redeemable Debentures
(2013/2018).

The long-term ratings carry a stable outlook. EAPF screens and
distributes local and foreign films in Sri Lanka through its owned and managed
screens. The Company owns 17 screens and manages 28 across the island.

The ratings are upheld by the Company’s dominance in film exhibition industry.
EAPF has a strong market position in film exhibition. The Company owns and
manages 45 theatres in strategic locations in Sri Lanka, making it the second
largest player in terms of number of theatres under its wing. (The largest player,
Rithma circuit, is a national player which focuses on promoting the local film
industry).

This coupled with the Company’s wide network of theatres make it the
preferred choice when commercial movies are released. Additionally, EAPF is one
of 5 film distributors in Sri Lanka licensed by the National Film Corporation
(“NFC”) to import and exhibit foreign films. The Company has an approximate
60% share of the local film exhibition market, which gives it an edge over its
peers.

Meanwhile, the ratings are also upheld by the Company’s strong debt protection
metrics. EAPF’s financial profile has historically remained strong, underscored by
its relatively low gearing and debt levels. The Company is mainly funded by its
parent, Swarnamahal Jewellers (“SJL”), and its directors. Directors funding
accounted for 85% of EAPF’s total debts in FY Mar 2013.

EAPF had fully settled
borrowings from SJL via a LKR 136.50 million share issue in FY Mar 2013, which
reduced the Company’s debt load to LKR 199.50 million from LKR 356.98 million
as at end-March 2012.

The lower debt level resulted in a healthy gearing ratio of
0.18 times (excluding related party funding: 0.03 times) in FY Mar 2013
compared to 0.46 times the previous year. The Company’s debt protection
metrics improved in line with its reduced debt load. Its funding from operations
(“FFO”) debt coverage clocked in at 1.03 times (excluding related party funding
6.99 times) in FY Mar 2013 (FY Mar 2012: 0.50 times, with a debt load entirely
from related parties). However, going forward, borrowings are expected to
increase in the short to medium term to fund the establishment of a new
multiplex, which will moderate the Company’s FFO debt coverage levels to around
0.41 times by end-March 2014.

However, we note EAPF’s financial performance is vulnerable to blockbuster
availability. EAPF’s revenue has been volatile in the past, mainly due to the availability of blockbuster films.

Sri Lanka has had few box-office films, mainly
due to inadequate technology and financial limitations. Although the Company
has greater bargaining power in securing film exhibition rights, the success of a
film depends on the screenplay.