NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the IDRs of Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas)at 'B+'. Fitch has also upgraded the senior unsecured notes at Regal by one notch to 'B/RR5', as a result of Fitch's updated recovery analysis. The Outlook remains Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Regal's ratings reflect Fitch's belief that movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
Despite a strong comparison with the 2012 industry box office, 2013's film slate delivered positive growth in box office revenues, up 0.8%, according to Box Office Mojo. Attendance declines of 1.3% were offset by a 2.1% increase in average ticket price. This will pose a tough comparison year in 2014. However, as in the past few years, there are many high-profile sequels that have a strong likelihood of box office success. The releases of 'Captain America: Winter Soldier', 'The Amazing Spider-Man 2', 'X-Men: Days of Future Past', 'Transformers: Age of Extinction', 'The Hunger Games: Mockingjay Part 1', and 'The Hobbit: There and Back Again', headline a strong film slate. Fitch believes the film slate will support industry-wide box office revenue levels with flat to low single digit declines in attendance and flat average ticket price.
Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. While high margin concessions may be pressured, Fitch believes that in the long term, the exhibitors will benefit from delivering an improved value proposition to its patrons, and that premium food services/offerings will grow absolute levels of revenue and EBITDA.
Fitch believes that Regal will continue to focus free cash flow (FCF) deployment toward expansion/build-out of theaters, acquisition of theater assets, and/or for shareholder-friendly
The ratings factor the intermediate/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, collapsing film distribution windows and increasing indirect competition from other distribution channels (such as DVD, VOD, and OTT). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance and that 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.
LIQUIDITY AND LEVERAGE
Regal's solid liquidity position is supported by $270 million of cash on hand as of Sept. 27, 2013 and $82.3 million availability under its $85 million revolver due 2017. FCF before dividend, as of Sept. 27, 2013, latest 12 month (LTM) was $324 million. Fitch expects pre-dividend FCF between $200 million and $300 million over the next two years. Fitch estimates approximately $130 million in annual dividends.
Regal has a manageable maturity profile with Regal Cinemas' term loans due in 2017 as its next material maturity:
--Regal Cinemas' $981 million secured term loans (due 2017; amortize $10 million per annum);
--Regal's $311.4 million unsecured notes (due 2018);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's $250 million unsecured notes (due 2023); and
--Regal's $250 million unsecured notes (due 2025).
Fitch believes that Regal will have sufficient liquidity, including access to credit markets, to address its maturities.
Fitch calculates unadjusted gross leverage of 3.7x (including NCM dividend), and interest coverage at 4.5x as of Sept. 27, 2013.
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 $2.1 billion, using a 5x multiple and including an estimate for Regal's 17.9% stake in National CineMedia, LLC of approximately $170 million.
The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's belief that 91% ﾀﾭ 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 full recovery for Regal Cinemas' senior unsecured notes; however, due to the unsecured nature of these notes, Fitch assigns an 'RR2' Recovery Rating.
The upgrade of Regal's senior unsecured notes reflects Fitch's updated recovery analysis assumptions. The ratings also reflect the structural subordination of the notes. The senior unsecured notes at the parent level would be expected to have below average recovery (11% - 30%), reflecting an 'RR5'.
Limited Rating Upside: 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.
Negative Trigger: Fitch anticipates that the company, and other movie exhibitors, will continue to consolidate. While not anticipated, a debt-financed material acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 4.5x could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove leverage beyond 4.5x would pressure the rating as well.
Fitch has taken the following rating actions on Regal and Regal Cinemas:
--IDR affirmed 'B+';
--Senior unsecured notes upgraded to 'B/RR5' from 'B-/RR6'.
--IDR affirmed at 'B+';
--Senior secured credit facility affirmed at 'BB+/RR1';
--Senior unsecured notes affirmed at 'BB/RR2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector' (Sept. 19, 2013);
--'Regal Entertainment Group' (Sept. 26, 2013);
--'An Exclusive Preview: Fitch's 2013 Movie Exhibitor Outlook and Analysis' (April 12, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector
Regal Entertainment Group