NEW YORK--()--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:
--Fitch believes movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
--Box office revenue grew solidly in 2012 (+6.5% according to Box Office Mojo) driven mostly by attendance growth. The 2012 film slate was highlighted by The Avengers, The Dark Knight Rises, The Hunger Games, Skyfall, The Hobbit, and the Twilight Saga.
--Fitch recognizes that theater attendance is inherently volatile due to the quality of the film slate in any given year. The 2013 slate is promising with many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World. However, due to the strong 2012 performance, which will be a challenge to match, Fitch's current base case for 2013 is for attendance to decline in the low single digits.
--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. 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, and increasing indirect competition from other distribution channels (such as VOD and other OTT services). Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
--Fitch does not anticipate a significant decline in concession revenue per patron, but 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. A slight deterioration in concession margin is factored into the current rating. While Fitch expects increased concession spend per guest, margins are expected to contract due to the lower margin premium menu offerings introduced by Regal and other theater circuits.
--Fitch believes that Regal will continue to focus free cash flow (FCF) deployment toward build-out/expansion of theaters, acquisition of theater assets, and/or for shareholder-friendly activities.
--Fitch weighs the prospective challenges facing Regal and its industry peers in arriving at the long-term credit ratings heavily . Significant improvements in the operating environment (e.g. sustainable increases in attendance) and sustained deleveraging could have a positive effect on the rating, though Fitch views this as unlikely.
--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 could pressure the rating as well.
As of Sept. 27, 2012, liquidity consisted of $253 million in cash and $82 million of availability 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 FCF for latest 12 months ended September 2012 was $136 million. Fitch expects 2012 FCF to be negative $50 million. Fitch's FCF calculation deducts both the $155 million special dividend and Regal's regular dividend. In 2013, including its regular dividend payment, Fitch expects FCF to be roughly $50 million to $75 million. The company does not have any pension obligations.
As of Sept. 27, 2012, pro forma for the $250 million Regal issuance in January, gross debt totaled $2.25 billion and was made up of:
--Regal Cinemas' $990 million secured term loans (due 2017);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's $525 million unsecured notes (due 2018); and
--Regal's $250 million unsecured notes (due 2025).
Fitch calculates Regal's pro forma consolidated lease adjusted gross leverage at 5.1x and unadjusted gross leverage at 4.6x. While pro forma unadjusted gross leverage is currently outside of Fitch's longer term parameters, Fitch forecasts leverage to be below 4.5x at year-end 2012. There is tolerance in the current rating for leverage to go above 4.5x for a short period of time due to fluctuations in the box office.
Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, thus, 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 $1.7 billion, using a 5x multiple and including an estimate for Regal's roughly 20% stake in National CineMedia, LLC of approximately $190 million. Based on this enterprise valuation, which is before any administrative claims, overall recovery relative to total current debt outstanding is approximately 75%.
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 $3.2 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). Fitch's recovery analysis shows 84% recovery for Regal Cinemas' senior unsecured notes (equal in ranking to the rejected operating leases), which maps to an 'RR2' Recovery Rating. The 'RR6' assigned to Regal's senior unsecured notes reflects the structural subordination of the notes and Fitch's expectation for zero recovery.
Fitch has affirmed the following ratings:
--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 issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers