TEXT-S&P raises Cinemark USA secured debt rating
Overview -- We have updated our hypothetical default EBITDA assumption for U.S. movie exhibitor Cinemark, resulting in a higher gross emergence enterprise value than in our previous recovery analysis. -- We revised our recovery ratings on the company's senior secured debt and on its 8.625% notes. We also raised our issue-level ratings on this debt in turn with our recovery rating notching criteria. -- All other ratings on Cinemark, including the 'BB-' corporate credit rating, were affirmed. -- The stable rating outlook reflects our expectation that despite secular risks facing the industry, Cinemark will continue to be profitable over the near term and maintain credit metrics appropriate for the 'BB-' rating. Rating Action On April 26, 2012, Standard & Poor's Ratings Services revised its recovery rating on Cinemark USA Inc.'s senior secured debt to '1', indicating an expectation of very high (90% to 100%) recovery for lenders in the event of a payment default, from '2' (70% to 90% recovery expectation). We raised the issue-level rating on this debt to 'BB+' (two notches higher than the 'BB-' corporate credit rating on holding company parent Cinemark Holdings Inc.) from 'BB', in accordance with our notching criteria for a '1' recovery rating. At the same time, we also revised our recovery rating on the company's 8.625% senior unsecured notes to '5', indicating our expectation of modest (10% to 30%) recovery for senior unsecured lenders in the event of a payment default, from '6' (0% to 10%). We raised the issue-level rating on this debt to 'B+' (one notch lower than the 'BB-' corporate credit rating) from 'B', in accordance with our notching criteria for a '5' recovery rating. The recovery rating revisions reflect a change to our estimated EBITDA at default and emergence valuation under our simulated default scenario. Although our assumed distressed EBITDA multiple is unchanged at 5.5x, the change to our default EBITDA assumption resulted in a higher gross emergence enterprise value than in our previous analysis. All other issue-level ratings on Plano, Texas-based Cinemark's debt were affirmed, as was our 'BB-' corporate credit rating on the company. The rating outlook is stable. Rationale The 'BB-' corporate credit rating reflects our expectation that leverage and capital spending will remain relatively high, but that Cinemark will continue to be among the most profitable theater chains. We consider the company's business risk profile to be "fair" (based on our criteria) because of the company's consistent operating performance despite the inherent unpredictably of the movie business. Relatively high leverage and aggressive capital spending plans underpin our view that Cinemark's financial risk profile is "aggressive." Although we expect that Cinemark will continue to outperform its U.S. peers and maintain industry-leading EBITDA margins, it operates in the movie exhibition industry, which we consider both mature and driven by the success of hit films. We believe these dynamics will result in the company achieving low-single-digit percentage revenue growth, on average, over the long term, with mid-single-digit EBITDA growth and flat to slightly lower leverage. Cinemark is the third-largest movie exhibitor in the U.S., by revenue, with a significant presence in Latin America that is supporting growth. Our assessment of Cinemark's business risk profile as "fair" stems from the industry's exposure to the fluctuating popularity of Hollywood films and proliferating entertainment alternatives. Additional risks include a shortening interval between theatrical and lower-priced video-on-demand (VOD) or DVD release, and consumer resistance to higher 3-D ticket prices that we expect will pressure theater attendance over the long term. Cinemark has a high-quality circuit, having resisted building oversized theaters, which have excess capacity during shoulder seasons of lower release activity. Moreover, Cinemark has not acquired underperforming properties to the extent that its more acquisition-oriented competitors have. As a result, its EBITDA margin compares favorably to peers'. Under our base-case scenario for 2012, we expect revenue and EBITDA to grow at a mid-single-digit rate, with most of the growth driven by increased international attendance, low-single-digit growth in ticket prices, and strong domestic box-office performance in the first quarter of the year. We expect international attendance to grow at a high-single-digit rate in 2012, resulting from increased utilization and theater expansion. We envision flat to minimally higher concession prices, and we assume stable concession sales per patron volume. We expect the EBITDA margin to remain relatively stable, and continue to outperform peers', despite moderate increases in concession costs. We see ongoing risk to attendance from studios releasing films to premium VOD platforms within the traditional theatrical release period. Cinemark has been outperforming other rated peers over the past couple of years. For the fourth quarter ended Dec. 31, 2011, revenue increased 2% year over year, while EBITDA decreased 1%, despite weak domestic box-office performance and relatively tough comparisons in the company's international markets. Total attendance increased 2%, with international attendance growth more than offsetting a 3% decline in domestic attendance. The company's EBITDA margin was relatively stable at 22% for 2011 and better than that of its peers. Cinemark's debt-to-EBITDA ratio (adjusted for leases) improved to 4.7x as of Dec. 31, 2011, from 4.9x in 2010, largely as a result of higher EBITDA. Adjusted leverage is in line with the indicative debt-to-EBITDA ratio range of between 4x and 5x that characterizes an "aggressive" financial risk profile under Standard & Poor's criteria. Adjusted EBITDA coverage of interest remained unchanged at 2.7x over the same period, with EBITDA growth offsetting higher interest expense related to recent refinancing activity. Our base-case scenario indicates that the company's credit metrics could improve slightly in 2012, incorporating modest revenue and EBITDA growth assumptions and minimal debt repayment. Capital spending for theater circuit expansion remains high, at 37% of EBITDA in 2011, up from 33% in 2010. The company expects to increase capital spending on new builds, mostly internationally, in 2012. As a result, we expect capital spending to increase to about 50% to 55% of EBITDA this year. Cinemark's dividend, which it raised 17% in November 2010, consumes an additional 20% of EBITDA--relatively high for a capital-intensive business. Discretionary cash flow could turn negative because of aggressive capital spending plans and dividend payouts in 2012. Liquidity In our view, Cinemark has "strong" liquidity. Our assessment of Cinemark's liquidity profile incorporates the following expectations and assumptions: -- We expect the company's sources of liquidity over the next 18 to 24 months to exceed its uses by 1.5x or more. -- We expect net sources would exceed uses, even if EBITDA were to decline by 30%. -- We expect the company would be able to maintain covenant compliance, even if EBITDA declined 30%. -- Because of the company's high cash balance and access to a currently undrawn revolving credit facility, we believe it could absorb low-probability, high-impact shocks. -- The company has solid relationships with its banks, and a good standing in credit markets, in our assessment. Cinemark's sources of liquidity consist of cash, which, as of Dec. 31, 2011, was $521.4 million, and an undrawn $150 million revolving credit facility. A portion of the $150 million revolver ($73.5 million) was extended to 2015. The remaining $76.5 million matures in October 2012. We expect the company to generate around $300 million to $350 million in funds from operations in 2012. Working capital needs are modest. Expected uses of liquidity in 2012 include about $250 million to $300 million of capital expenditures, around $100 million to $110 million of annual dividends, and minimal debt maturities. We also believe that cash could be used to make acquisitions. Discretionary cash flow could turn negative in 2012 because of aggressive capital spending plans and a high dividend payout. Additional liquidity could be provided by the company's stake in National CineMedia LLC, which trades publicly as National CineMedia Inc., with a current value of roughly $250 million. Annual debt principal payments are $9 million under the term loan, and there are no maturities until 2016. Roughly half of the undrawn revolver matures in October 2012, with the remainder maturing in March 2015. As of Dec. 31, 2011, the company had an adequate cushion of compliance with its net senior secured leverage covenant, which does not step down and applies only when the company draws on its revolving credit facility. Outlook The rating outlook is stable. Despite the secular risks facing the industry, we believe that Cinemark will continue to exhibit stronger profit measures than peers over the near term and maintain credit metrics at or near current levels. We currently view an upgrade as slightly more likely than a downgrade. We could raise the rating if the company continues to maintain its industry leading EBITDA margin and reduces leverage below 4x. This would likely entail the company's expansion plans supporting sustained attendance growth and discretionary cash flow, as well as debt reduction. We could lower the rating if operating performance weakens and aggressive theater expansion plans do not gain traction, causing discretionary cash flow to turn severely negative and leverage to exceed 5.5x on a sustained basis. This could entail, for example, revenue and EBITDA declines at a low-double-digit percentage rate and mid-20s rate, respectively, caused by low double-digit declines in attendance. Such declines could occur with reductions of Hollywood output, weak performance of peak summer mass audience films, and premium VOD gaining traction and eating into theaters' revenues. Related Criteria And Research -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines for Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Cinemark Holdings Inc. Cinemark USA Inc. Corporate Credit Rating BB-/Stable/-- Cinemark USA Inc. Subordinated B Upgraded To From Cinemark USA Inc. Senior Secured BB+ BB Recovery Rating 1 2 Senior Unsecured B+ B Recovery Rating 5 6
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