Making its debut in the term ABS market, Paramount Pictures recently priced $210 million in floating-rate notes backed by film royalties via lead manager Merrill Lynch.

The privately placed transaction received a Baa2' rating from Moody's Investors Service. Dubbed Melrose Investors, the vehicle finances a portfolio of films that will be produced or acquired by Paramount over the next three years. When fully funded, Melrose will finance 25% of the net production cost of each film just prior to its domestic theatrical release, with Paramount taking on the remaining 75%. The investment gives Melrose a participation interest in the film, which entitles it to 25% of net revenues generated by that film.

Moody's analyst Myrna Ekmekji said that although there were two recently released films - including the lucrative Lindsay Lohan teen comedy Mean Girls - in the deal at closing, the structure differed from previous film royalty transactions in that there was no established library of films.

"Other transactions have started off with a library as well as including films as they come out," Ekmekji said. "This is a participation interest on an ongoing basis."

With this structure, there is no true sale of the assets, she said, and it becomes more of a risk-sharing arrangement rather that a risk transfer: "Both the studio and the investor are at the same level."

Moody's rating is based on the historical performance of Paramount films and the anticipated slate of movies over the next 18 to 24 months; payment guaranty provided by the parent and A3'-rated Viacom Inc.; all of Paramount's payment obligations from net receipts including the put option and price; and the added incentive inherent in Paramount's retention of 75% of the remaining participation interest.

The last film royalty securitization was completed by Vivendi Universal, the parent company of Universal Pictures, in March 2003.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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