NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of AMC Entertainment, Inc. (AMC) at 'B', assigned a 'BB/RR1' rating to the proposed $300 million term loan and downgraded the senior unsecured notes to 'B-'/RR5 from 'B'/RR4. The Rating Outlook is Negative. The downgrade of the senior unsecured notes reflects a reduction in recovery prospects as a result of the additional secured term loans issued. See the full list of rating actions as the end of this release.
AMC announced its intention to tender $160 million of its $300 million outstanding 8% subordinated notes due March 2014. The total consideration of the tender offer is $1,002.50, per $1,000, which includes a $30 early redemption premium (early tender date is currently set at Feb. 21, 2012). The tender offer is subject to, among other provisions, the completion of the proposed term loans (discussed below). According to the 8% subordinated note indenture, the company may redeem the notes at par starting on March 1, 2012.
The subordinated note tender is expected to be funded with the $300 million term loan, due in 2018. The remaining proceeds from the term loan will be used to pay down the existing $141 million term loan balance due January 2013. The term loans will be issued under the existing credit agreement.
While the ratings and Outlook remain unchanged, the proposed transaction does improve AMC's maturity profile by extending $160 million of subordinated notes (due 2014) and $140 senior secured term loan balance (due 2013) to 2018. Pro forma for the transaction, AMC's next significant maturities include $140 million in subordinated notes due 2014, approximately $470 million in term loans due 2016, the proposed $300 million term loans due 2018, approximately $600 million in senior unsecured notes due 2019 and $600 million in subordinated notes due 2020.
On Oct. 17, 2011, Fitch affirmed AMC's IDR at 'B' and revised the Outlook to Negative from Stable. The Negative Outlook reflects the weakening credit metrics (interest coverage, EBITDA margins and gross leverage), and reflects the limited headroom within the current ratings for further deterioration. If the upcoming movie slate and the recent theater portfolio actions are unable to stabilize and drive improved credit metrics, Fitch may downgrade the ratings one notch.
AMC'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 (as a going concern) rather than a liquidation. Fitch estimates an adjusted, distressed enterprise valuation of $1.2 billion using a 5 times (x) multiple and including an estimate for AMC's 16% stake in National CineMedia LLC (NCM) of approximately $190 million. Based on this enterprise valuation, overall recovery for total debt is approximately 50% (this is before any administrative claims).
The 'RR1' Recovery Rating for the company's secured bank facilities reflects Fitch's belief that 91%?100% expected recovery is reasonable. While Fitch does not assign Recovery Ratings for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining $2.6 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 (at a net present value). The 'RR5' Recovery Ratings for AMC's senior unsecured notes (equal in ranking to the rejected operating leases) reflect an expectation of 11%-30% recovery.
Fitch assumes a nominal concession payment is made to the subordinate debtholders in order to secure their support of a reorganization plan. The 'CCC/RR6' rating for AMC's senior subordinated notes reflects Fitch's expectation for nominal recovery.
--Fitch believes movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
--Fitch expects that attendance and box office revenues should be supported by the upcoming healthy film slate for 2012. The 2012 film slate includes some highly anticipated movies such as The Avengers, The Dark Knight Rises, Spider-Man, the Hobbit Part 1, and the next installment of the Twilight series.
--Fitch notes that concession revenues have remained relatively stable. While Fitch does not anticipate a significant decline in concession per patron, Fitch remains cautious that high-margin concessions (which represent 28% of AMC's total revenues and carry 86% gross margins), may be vulnerable to reduced per-guest concession spending due to economic cyclical factors or a re-acceleration of commodity prices.
--The ratings factor in the intermediate/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, the pressure on film distribution windows, increasing indirect competition from other distribution channels (such as VOD, the Internet and DVD), and high operating leverage (which could make theater operators free cash flow negative during periods of reduced attendance).
--For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance and any potential attendance declines will offset some of the growth in average ticket prices.
--In addition, AMC and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
--Evidence over the next 12 to 24 months that credit metrics (interest coverage and EBITDA margins) have improved could lead to a stabilization of the ratings.
--An attendance decline at AMC in excess of 5% and/or interest coverage below 1.5x could lead to negative rating actions.
As of Dec. 29, 2011, liquidity consisted of $214 million in cash at AMC and full availability under AMC's $192.5 million secured credit facility due 2015. The secured credit agreement contains a secured leverage covenant of 3.25x, which is calculated on a net basis. Fitch does not believe the company is at risk of breaching this covenant. Current amortization on the AMC term loan is $6.5 million annually (under the proposed term loans, this amortization would go up approximately $2 million per year).
Fitch calculated free cash flow (FCF) for the latest 12 months (LTM) was a negative $1.2 million. Fitch expects FCF to be approximately $0 to $25 million for the fiscal years ended 2012 and 2013.
As of Dec. 29, 2011, Fitch calculated interest coverage is 1.5x. Including the NCM distribution in LTM EBITDA, interest coverage is 1.7x. Fitch notes that the tender offer may modestly reduce future interest payments.
As of Dec. 29, 2011, Fitch calculates lease adjusted gross leverage at 6.7x, unadjusted gross leverage at 9.3x and, if the NCM dividend is included in EBITDA, unadjusted gross leverage is at 8.4x. Fitch expects unadjusted gross leverage to remain above 7.5x over the next two fiscal year-end periods.
Fitch notes that the term loan at AMC's parent, AMC Entertainment Holdings, Inc. (AMC Holdings) was paid down with available cash at AMC Holdings and a dividend distribution from AMC. This transaction reduced debt by roughly $218 million and is reflected in the credit metrics listed above.
Fitch has taken the following rating actions:
--IDR affirmed at 'B';
--Senior secured credit facilities affirmed at 'BB/RR1';
--Senior unsecured notes downgraded to 'B-/RR5' from 'B/RR4';
--Senior subordinated notes affirmed at 'CCC/RR6'.
--Senior unsecured term loan Withdrawn.
The ratings of AMC Holdco have been withdrawn, as Fitch does not expect AMC Holdco to be a debt issuer.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' Aug. 12, 2011;
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' May 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers