NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed AMC Entertainment Holdings, Inc.'s Long-Term Issuer Default Rating (LT IDR) of 'B+' and related debt issue ratings on Rating Watch Negative. Fitch's actions follow AMC's announcements that it has entered into a definitive agreement to acquire European movie exhibitor Odeon & UCI Cinemas Group in a transaction valued at approximately US$1.2 billion or GBP921 million. Approximately US$2 billion of debt is affected by Fitch's rating action. A full list of rating actions follows at the end of this release.
The Rating Watch Negative reflects uncertainty surrounding the ultimate resolution of the pending Carmike acquisition and its potential impact on AMC's capital structure and the execution risks surrounding entering the European markets.
Resolution of the Rating Watch will be predicated on Fitch's review of the strategic benefits of the acquisition balanced against the execution risks related to company's ability to successfully leverage its domestic strategy in the new European markets. In addition, Fitch will assess AMC's financial policy, the funding strategy of both proposed acquisitions and its impact on AMC's credit profile as well as the company's ability and commitment to reduce leverage following the close of the acquisitions.
Fitch believes the acquisition is consistent with the company's strategy to add theatre assets that are complementary to its portfolio and establish a global footprint. Although AMC will be able to leverage its premium amenities and reseating initiatives, it remains to be seen whether this strategy will resonate well in overseas markets. AMC will acquire Odeon & UCI Cinemas Group, the largest theatre exhibitor in Europe, for a total consideration of $1.2 billion consisting of a mix of cash (approximately $488 million) and equity (approximately $163 million) as well as the assumption of Odeon & UCI's net indebtedness of approximately $529 million. Odeon & UCI will be a wholly-owned subsidiary of AMC and AMC intends to refinance Odeon & UCI's debt upon closing.
The acquisition will be financed with incremental debt of $1.2 billion and equity issuance and is expected to close during the fourth quarter of 2016 (4Q16) subject to receipt of antitrust approval by the European Commission. Fitch calculates unadjusted leverage pro forma for the acquisition of Odeon & UCI at 5.0x and unadjusted leverage pro forma for the acquisitions of Odeon & UCI and Carmike at 5.5x as of March 31, 2016. Fitch expects unadjusted leverage to be maintained at or below 4.5x in the 12-18 months following the acquisition to maintain the 'B+' rating. AMC's target net leverage of 4.0x signals a more aggressive financial policy that may be outside Fitch's threshold for a 'B+' rating.
KEY RATING DRIVERS
AMC has demonstrated traction in key strategic initiatives, as can be seen in its improving admission revenue per attendee, concession revenue per attendee, and concession gross profit per attendee. Fitch calculates March 31, 2016 latest 12 months (LTM) EBITDA margins of 16.9% (excludes National Cinemedia distribution), an improvement from 13.6% at Sept. 27, 2012. Fitch recognizes that AMC's continued expansion into premium food offerings will pressure high concession margins; however, growth in the top line should grow absolute gross profit dollars in this segment.
AMC Entertainment Holdings Inc. (AMCH) instituted a quarterly dividend of $19.6 million ($78 million for the full year), with the first dividend paid in 2Q14.) For the LTM period, AMCH paid $78.6 million in dividends. In conjunction with elevated capital expenditures relative to historical periods, the dividend will pressure FCF. Fitch has modeled capital expenditure spending of approximately $255 million to $275 million in 2016 and 2017. As a result, Fitch expects FCF will range from zero to positive $50 million over the next two years. LTM FCF at March 31, 2016 was $69 million.
Fitch believes that AMC has sufficient liquidity to fund capital initiatives, make small theater-circuit acquisitions, and cover its term loan amortization. Liquidity is supported by cash balances of $108 million and availability of $75 million on its secured revolver as of March 31, 2016.
AMC'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.
According to Box Office Mojo, 2015's box office delivered positive growth of 7.4% and record-setting box office revenues of $11.1 billion. Industry fundamentals benefited from a strong slate, which recorded attendance growth of 4.1% and a 3.2% increase in average ticket price. As 2015 was a record year, it will pose a tough comparison in 2016. Similar to past years, the 2016 film slate features many high-profile tentpole films that have a strong likelihood of box office success, some of which have already proven to be domestic and international successes including 'Deadpool,' 'Captain America: Civil War' and 'Zootopia.' The releases of 'Finding Dory,' 'Star Trek Beyond,' 'Suicide Squad,' 'Fantastic Beasts and Where to Find Them,' and 'Rogue One: A Star Wars Story' headline a strong film slate for the remainder of 2016. Fitch believes the film slate will support flat- to low-single-digit industrywide box office revenue growth.
Fitch believes the investments made by AMC and its peers to improve the patron's experience are prudent. While capital expenditure may be elevated in the near term and high concession margins may be pressured over the long term, Fitch believes exhibitors will benefit from delivering an improved value proposition to their patrons and that the premium food services/offerings will grow absolute levels of revenue and EBITDA.
In addition, AMC and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
Fitch's key assumptions within the rating case for AMC Entertainment include:
--Flat- to low-single-digit admissions revenue growth; low-single-digit growth in average ticket price;
--EBITDA margin expansion;
--Capital expenditures are expected to remain elevated in the near term as AMC continues to invest in recliner re-seats and F&B offerings. Fitch expects capex of $255 million-$270 million (net of landlord contributions) during 2016;
--Pro forma unadjusted gross leverage above 4.5x during 2017.
Positive Trigger: Fitch weighs the prospective challenges facing AMC and its industry peers heavily when considering the long-term credit rating. Significant improvements in the operating environment (sustainable increases in attendance from continued success of operating initiatives) driving FCF/adjusted debt above 2% and adjusted leverage below 4.5x on a sustainable basis could have a positive effect on the rating. In strong box office years, metrics may be strong in order to provide a cushion for weaker box office years.
Negative Trigger: Negative rating actions are more likely to coincide with the company's inability to reduce adjusted leverage below 6.0x (4.5x on an unadjusted basis) in the 12-18 months following the acquisition of Odeon & UCI, or the adoption of a more aggressive financial policy, and/or rent-adjusted interest coverage declines below 1.5x-1.75x.
In addition, meaningful, operational deterioration that may include sustained declines in attendance and/or per guest concession spending or other change in capital allocation that delays the company's planned leverage reduction may also pressure the ratings.
AMC's liquidity is supported by $108 million of cash on hand (as of March 2016) and $75 million availability on its revolving credit facility, which is sufficient to cover minimal amortization payments on its term loan.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Negative:
AMC Entertainment Holdings, Inc.
--Long-Term IDR 'B+';
--Senior secured credit facilities 'BB+/RR1';
--Senior subordinated notes 'B-/RR6'.
Date of Relevant Rating Committee: July 12, 2016
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and adjust for cash received from AMC's investment in National Cinemedia, Inc. In 2015, Fitch added back $10.5 million in non-cash stock-based compensation and $22.7 million related to cash distributions from National CineMedia.
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