Fitch Ratings has taken the following rating actions on Regal Entertainment Group (RGC) and Regal Cinemas Corporation (Regal Cinemas):
RGC
--Issuer Default Rating (IDR) affirmed at 'B+';
--Senior unsecured convertible notes downgraded to 'CCC/RR6' from 'B-/RR6'.
Regal Cinemas:
--IDR affirmed at 'B+';
--Senior secured facility affirmed at 'BB/RR2';
--Senior subordinated notes downgraded to 'B-/RR6' from 'B/RR5';
The Rating Outlook is Stable.
The ratings continue to reflect RGC's size and position as the largest domestic movie exhibitor, with 6,782 screens in 551 theaters. RGC's portfolio has higher-than average screens per location (approximately 12) and Fitch expects the company to continue to improve its relatively modern theater circuit in a disciplined manner. The ratings also reflect solid geographic diversity, sound operating performance and relatively stable free cash flow generation (before dividends). The rating is also supported by the 2009 solid film slate (including several sequels to successful series) which may keep attendance relatively steady.
These factors are balanced by the intermediate-term risks associated with increased competition from at-home entertainment media, heavy reliance upon a limited number of film distribution companies, limited control over revenue trends, collapsing film distribution windows, increasing indirect competition from other distribution channels (such as DVD, video on demand or the Internet), high operating leverage (which could make theater operators free cash flow-negative during periods of reduced attendance), and a history of aggressive dividend payouts. Most importantly, RGC and its peers rely on the quality, quantity and timing of movie product, all factors out of management's control.
While attendance has historically been resistant to economic weakness (dependent on supply of quality films), Fitch believes high margin concessions, that represent 26% of RGC's total revenues and carry 85% gross margins, may be vulnerable to reduced per-guest concession spending due to cyclical factors or a re-acceleration of commodity prices. Assuming only a slight increase in ticket price, Fitch estimates that a 10% decline in concession spending per patron coupled with a 5% decline in attendance could reduce EBITDA margins by approximately 200 basis points and EBITDA by over 20%. Given the dependence on concession profit, Fitch will continue to closely monitor its resilience in the face of very weak economic conditions.
On Jan. 21, 2008, RGC announced amendments to their bank credit agreement, including an amendment that postponed a 0.25 times (x) step downs in both RGC's leverage (3.75x to 3.5x) and adjusted leverage (5.75x to 5.5x) ratios until 2011 (previously scheduled to drop in 2009). The leverage covenants are calculated on a net debt basis at the Regal Cinemas level. Fitch calculates that there is still limited flexibility around both ratios.
In addition to the flexibility in the leverage covenants, the amendment permits RGC to (1) conduct a Dutch Auction and repurchase up to $300 million in term loans by Oct. 17, 2009; and (2) when calculating the leverage and adjusted leverage ratios (for compliance purposes only), RGC may exclude up to $200 million in debt, that is subordinated to the bank credit agreement debt, issued for the purpose of refinancing term loan debt. In exchange for this flexibility, the amendment increases the credit agreement pricing by 200 bps across all pricing tiers and a one time amendment fee of 50 bps (approximately $8.4 million).
As of Sept. 25, 2008, liquidity is made up of $113.1 million in cash and $92.5 million in credit facility availability (reduced by $2.5 million in letters of credit and $5 million exposure to Lehman), under its $100 million credit facility which matures in October 2011. Total debt as of Sept. 30, 2008 was $2.0 billion and lease adjusted leverage was 6.0x (unadjusted leverage was 4.2x). The company has no significant maturity until 2011.
RGC's recovery ratings reflect Fitch's expectation that the enterprise value of the company, and hence, recovery rates for its creditors, will be maximized in a restructuring scenario (going-concern), rather than a liquidation. The 'RR2' recovery rating for the company's credit facilities reflects Fitch's belief that 71%-90% expected recovery is reasonable. While Fitch does not assign recovery ratings for the company's operating lease obligations, it is assumed that the company rejects only 30% of its remaining $3.6 billion in operating lease commitments due to their significance to the operations in a going-concern scenario and is liable for 15% of those rejected values. The 'RR6' recovery ratings for Regal Cinemas senior subordinated notes and RGC's convertible notes reflect the lack of any expected recovery. The notching difference between these instruments, Regal Cinemas senior subordinated note 'B-' and RGC's convertible notes 'CCC', reflect the different priority they have in the capital structure. The convertible notes are at the holding company, subordinating them to Regal Cinemas current debt.
For additional information on the movie exhibitor industry, see press release 'Fitch: High Debt Levels Reduce Flexibility for U.S. Movie Exhibitors in 2009,' dated Jan. 27, 2009, or full report on Regal Entertainment both available on www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Contacts:
Fitch Ratings
Rolando Larrondo, +1-212-908-9189 (New York)
Mike
Simonton, CFA, +1-312-368-3138 (Chicago)
Media Relations:
Cindy
Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com