NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B+' issuer default rating (IDR) of Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas). The Outlook is Stable. Please see a full list of ratings at the end of the release.
The ratings and Stable Outlook reflect the following considerations:
--The ratings are supported by the company's size and position as the largest domestic movie exhibitor, with 528 theaters and 6,605 screens.
--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.
--High-margin concession revenues have declined due to reduced attendance; however, concession revenue per attendee has remained stable. While Fitch does not anticipate a significant decline in concession per patron, Fitch remains cautious that high-margin concessions (which represent 26% of Regal's total revenues and carry 87% gross margins), may be vulnerable to reduced per-guest concession spending due to economic cyclical factors or a re-acceleration of commodity prices.
--Fitch believes that Regal will continue to focus free cash flow (FCF) deployment towards build-out/expansion of theaters, acquisition of theater assets and/or for shareholder-friendly activities.
--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, Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
--Fitch anticipates that Regal, and other movie exhibitors, will continue to consolidate. While not anticipated, a material debt-funded acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 4.5x could have a negative impact on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending, which drove leverage beyond 4.5x, may pressure the rating as well.
--Fitch heavily weighs the prospective challenges facing Regal and its industry peers in arriving at the long-term credit ratings. Significant improvements in the operating environment (sustainable increases in attendance) and sustained deleveraging could have a positive effect on the rating, though Fitch views this as unlikely.
2012 Growth Expectations
Regal demonstrated its ability to manage costs and maintain EBITDA margins of 17% for the last twelve months ended September 2011, despite attendance declines. Fitch believes that attendance could grow in the low single digits in 2012, driving revenue growth in the mid single digits and EBITDA growth in the mid to high single digits.
As of Sept. 29, 2011, liquidity consisted of $179 million in cash and $82 million of availability (reduced by $3 million in letters of credit), under Regal Cinemas $85 million revolving credit facility due May 2015. There are no significant maturities until 2017 when the term loan facility comes due.
Fitch calculated free cash flow (FCF) for latest 12 months ended September 2011 was a negative $62.1 million (including an extraordinary dividend declared in Q4 2010 of $216 million). Fitch expects 2012 FCF, before any extraordinary dividends, to be in the range of $125 to $175 million. The company does not have any pension obligations.
As of Sept. 29, 2011, gross debt totaled $1.9 billion and was made up of Regal Cinemas' $1 billion secured term loans (due 2017) and $400 million unsecured notes (due 2019) and Regal's $525 million unsecured notes (due 2018). Fitch calculates Regal's consolidated lease adjusted gross leverage at 5.2x and unadjusted gross leverage at 4.4x. Fitch expects unadjusted gross leverage to gradually decline over the next few years, but remain above 3.75x.
Regal'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 a distressed enterprise valuation of $1.8 billion, using a 5x multiple and including an estimate for Regal's 20% stake in National CineMedia, LLC of approximately $180 million. Based on this enterprise valuation, which is before any administrative claims, overall recovery relative to total current debt outstanding is approximately 90%.
The 'RR1' Recovery Rating for the company's credit 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 $3.4 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). While Fitch's recovery analysis shows the potential for full recovery for Regal Cinemas' senior unsecured notes (equal in ranking to the rejected operating leases), Fitch's criteria caps the Recovery Ratings for senior unsecured debt at 'RR2'. The 'RR6' assigned to Regal's senior unsecured notes reflects the structural subordination of the notes and Fitch's expectation for nominal recovery.
Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'B+';
--Senior unsecured notes at 'B-/RR6'.
--IDR at 'B+';
--Senior secured credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.
The Rating Outlook is Stable.
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