NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'B/RR5' to Regal Entertainment Group's (Regal) proposed eight-year senior unsecured notes. The new notes will rank pari passu with Regal's existing senior unsecured notes. Proceeds from the issuance are expected to fund the company's tender offer for the remaining $311.4 million aggregate principal amount of its 9.125% senior notes due 2018. Please see a full list of ratings at the end of the release.
The notes will be issued under the Jan. 17, 2013 base indenture and has a three-year soft call protection. Covenants include limitation on consolidated debt (net interest coverage greater than 2x incurrence test), limitation on restricted payments (a basket that increases based on, among other factors, the excess of EBITDA over 1.7x interest expense) and limitation on liens (standard carve-outs exist in addition to an incurrence test of 2.75x net senior secured leverage). In addition, the indenture includes a change of control provision that is triggered if any person (except for the Anschutz Company and any of its affiliates) becomes the beneficial owner of 50% or more of the voting stock of Regal. Other change of control triggers include a majority change in the Board of Directors, the liquidation or dissolution of Regal, and/or if all or substantially all of Regal's and its subsidiaries' assets are sold. There are cross payment default/cross acceleration provisions (among Regal and Regal Cinemas) in regard to defaulted/accelerated debt in excess of $25 million.
Regal intends to use the net proceeds after tender or, if the tender offer is terminated, for general corporate purposes and for repayment of debt at Regal or Regal Cinemas Corporation.
Fitch expects the transaction to be leverage neutral and to reduce interest expense.
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 activities.
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 $281 million of cash on hand as of Dec. 26, 2013 and $82.3 million availability under its $85 million revolver due 2017. FCF before dividend, as of Dec. 26, 2013, latest 12 month (LTM) was $235 million. Fitch expects pre-dividend FCF between $200 million and $300 million annually over the next two years. Fitch estimates approximately $130 million in annual dividends.
Pro forma the refinancing, Regal has a manageable maturity profile with Regal Cinemas' term loans due in 2017 as its next material maturity:
--Regal Cinemas' $978 million secured term loans (due 2017; amortize $10 million per annum);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's new unsecured notes (due 2022);
--Regal's $250 million unsecured notes (due 2023);
--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 3.9x (including NCM dividend), and interest coverage at 4.2x as of Dec. 26, 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 20.0% stake in National CineMedia, LLC of approximately $200 million.
The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's belief that 91% to 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 $3.3 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 has assigned an 'RR2' Recovery Rating.
The rating of Regal's senior unsecured notes reflects 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 currently rates Regal and Regal Cinemas as follows:
--Issuer Default Rating (IDR) 'B+';
--Senior unsecured notes 'B/RR5'.
--Senior secured credit facility 'BB+/RR1';
--Senior unsecured notes '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
An Exclusive Preview: Fitch's 2013 Movie Exhibitor Outlook and Analysis