The movie industry is less than a week away from its all-important summer blockbuster season, and what happens at the box office this year may be more crucial than ever for Canada's biggest distributor, Alliance Films.
Heading into one of the busiest and most lucrative periods for the industry, debt rating agencies have begun raising concerns about the company's financial outlook since it was taken over by Goldman Sachs Group Inc. last year.
The distributor, which was acquired in the buyout of Alliance Atlantis Communications Inc., has dominated the Canadian distribution industry for years.
But Moody's Investor Service and Standard & Poor's warn Alliance Films may soon be unable to meet its financial commitments amid a heavy debt load.
By the end of June, Alliance Films could require a significant infusion of cash from its two main investors, Goldman and the Société générale de financement du Québec, the investment arm of the Quebec government, to meet its bank covenants, the agencies warn.
"Alliance Films' ability to avoid a payment default and to execute its business plan will be contingent upon cash injections from investors and continued support from its creditors in agreeing to waive or amend the financial covenants," Standard & Poor's analyst Greg Pau said in a recent report.
Moody's also raised concerns with a downgrade of Alliance's credit rating last week, due to "high leverage, weak liquidity and risk associated with film quality and contract renewal."
Alliance Films is not commenting on the downgrades, but a source at the company said they will have no effect on its ability to do acquisitions or its ongoing sales operations. The distributor has talked about expanding in Europe, and cash flow is stable, the person said. The problems come as the movie industry is salivating at what could be a lucrative summer; one that could see Alliance on the outside of the biggest box office returns.
The summer season starts Friday with the release of Iron Man. Other so-called tent-pole films that prop up studio and distributor revenues for the rest of the year are the latest Indiana Jones instalment, The Incredible Hulk, and Batman's The Dark Knight.
All of those movies arrive in the next three months. And none of them are in Alliance's roster. The company will instead be looking to the late-May release of Sex and the City, based on the hit television show, to provide some of its strongest returns of the season.
Alliance traditionally hasn't been a major player in the summer, but observers say it could use a strong performance from its 2008 titles, including Journey to the Centre of the Earth 3D, a promising children's release in July.
The company buys film rights from major studios and profits from their theatrical performance in Canada and other countries outside the U.S., and through subsequent DVD and television sales. Alliance has performed well in recent years, distributing major hits including the Lord of the Rings trilogy. However, the recent loss of a key output deal with New Line Cinema has curtailed revenue.
While Sex and the City is expected to do well in theatres, it may only gross roughly $100-million in North America, meaning the Canadian take will be considerably smaller, one analyst said. For those reasons, even a windfall likely won't be enough to take pressure off the company. Rather, Alliance will likely be forced refinance the terms of its debt.
Last year was a record summer for blockbusters in general, and it's unclear whether this season's slate can top that performance.
Summer 2007 made $4.1-billion (U.S.) in box office receipts, led by titles such as Shrek the Third and Spider-Man 3.
The Big Summer Blockbusters of 2008
Coming this summer
Iron Man May 2
Indiana Jones and the Kingdom of the Crystal SkullMay 22
The Incredible Hulk June 13
The Dark KnightJuly 18
Alliance Films' Summer Releases
Sex and The CityMay 30
The Strangers May 30
Journey to the Centre of the Earth 3D July 11
Recent Hits for Alliance
No Country for Old Men, 2007
Atonement, 2007
Lord of the Rings Trilogy, 2001-03
Recent Disappointments
for Alliance
The Golden Compass, 2007
$10-million Canadian box office
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