TEXT-S&P summary: Cinemark Holdings Inc.
Cinemark is the third-largest movie exhibitor in the U.S., by revenue, with a significant and profitable 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 three-dimensional (3D) ticket prices that we expect to 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 with peers'.
Under our base-case scenario for 2012, we expect mid- to high-single-digit percentage revenue and EBITDA growth for the full year. We expect nearly all of the growth to come from higher international attendance levels and modest ticket price increases. For 2013, we expect revenue to grow at a low- to mid-single-digit percentage rate, driven by the addition of new theaters and an increase in international attendance. However, we believe EBITDA could be flat to down at a low-single-digit rate because of the additional costs of opening new theaters and our expectation of domestic attendance declines. We expect international attendance to grow at a high-single-digit rate in 2013, resulting from increased utilization and theater circuit expansion, which should more than offset domestic attendance declines. We envision flat to minimally higher concession prices, and assume stable concession sales per patron volume. We expect the EBITDA margin could decline modestly if Cinemark increases the number of new theaters, which initially have lower utilization. We still expect Cinemark's margin will continue to outperform peers'. We see ongoing risk to attendance from studios releasing films to premium VOD platforms within the traditional theatrical release period.
Cinemark maintained healthy international growth and domestic performance was only slightly worse than industry averages in the third quarter ended Sept. 30, 2012. Revenue and EBITDA declined 1% and 4%, respectively, year over year, with domestic revenue declines more than offsetting strong international growth. Total attendance was roughly flat, with international attendance growth of 14% offsetting a 7% decline in domestic attendance. The company's EBITDA margin for the 12 months ended Sept. 30, 2012, increased slightly to 22.5% from 22.2% in the prior-year-period because of strong first-quarter domestic box-office performance.
Cinemark's debt-to-EBITDA ratio (adjusted for leases) improved to 4.4x as of Sept. 30, 2012 from 4.7x in the prior-year period, largely because of EBITDA growth. 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 our criteria. Adjusted EBITDA coverage of interest improved to 2.8x from 2.7x over the same period. Our base-case scenario indicates Cinemark's leverage could return to the mid- to high-4x area based on our expectation of flat to slightly lower EBITDA and minimal debt repayment.
Capital spending for theater-circuit expansion remains high, at 38.1% of EBITDA in the 12 months ended Sept. 30, 2012, down slightly from 38.5% in the prior-year-period, because of EBITDA growth. As a result of continued expansion, we expect capital spending to increase to about 40% to 50% of projected EBITDA for the full year of 2012 and in 2013. Cinemark's dividend, which it raised 17% in November 2010, consumes an additional 18% of EBITDA--relatively high for a capital-intensive business. As of Sept. 30, 2012, the conversion rate of EBITDA to discretionary cash flow declined to 13% from 22% in the prior-year-period, because higher capital spending and less favorable working capital dynamics. Discretionary cash flow could fluctuate from modestly positive to modestly negative in 2013 depending on box-office performance and the company's aggressive capital spending plans and dividend payouts.
In our view, Cinemark has "strong" liquidity. Our assessment of Cinemark's liquidity profile incorporates the following expectations and assumptions:
-- We expect sources of liquidity over the next 18 to 24 months to exceed its uses by 1.5x or more.
-- We expect net sources to exceed uses, even if EBITDA declines by 30%.
-- We expect Cinemark to maintain covenant compliance, even if EBITDA declined 30%.
-- Because of its high cash balance and access to a currently undrawn revolving credit facility, we believe Cinemark 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 Sept. 30, 2012, was $540.8 million, and an undrawn $73.5 million revolving credit facility. We expect it to generate around $325 million to $375 million in funds from operations for full-year 2012 and in 2013. Working capital needs are modest. Expected uses of liquidity in 2012 include about $225 million to $250 million of capital expenditures in 2012 and 2013, around $100 million of annual dividends, and minimal debt maturities. We also believe some portion of cash balances could be used to make acquisitions. Under our base-case scenario, we expect discretionary cash flow to be slightly positive in 2012 and could turn modestly negative in 2013 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 $238 million at Nov. 14, 2012.
Annual debt principal payments are $9 million under the term loan, and there are no maturities until 2016. Cinemark's undrawn revolver matures in March 2015. As of Sept. 30, 2012, Cinemark had an adequate margin of compliance with its net senior secured leverage covenant, which does not step down and applies only when it draws on its revolving credit facility. We expect Cinemark to maintain sufficient headroom with its covenant.
We have assigned subsidiary Cinemark USA Inc.'s senior secured revolving credit and term loan facility a 'BB+' rating (two notches higher than the corporate credit rating on the parent), with a recovery rating of '1', indicating our expectation that lenders would recover a very high amount (90%-100%) of principal and prepetition interest in the event of a default. The senior unsecured notes are rated 'B+' (one notch below the corporate credit rating) with a recovery rating of '5', indicating our expectation of modest recovery (10%-30%) in the event of a default. The senior subordinated notes are rated 'B' (two notches below the corporate credit rating) with a recovery rating of '6' indicating our expectation of negligible recovery (0-10%) in the event of default. (For the complete recovery analysis, see our recovery report on Cinemark Inc., published June 29, 2012, on RatingsDirect.)
Our rating outlook is stable. Despite the secular risks facing the industry, we believe Cinemark will continue exhibiting 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 our rating if Cinemark maintains its industry-leading EBITDA margin and reduces leverage below 4x. This would likely entail Cinemark articulating a financial policy targeting lower leverage, and moderating expansion plans to support these objectives.
We could lower our 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, low-double-digit percentage and mid-20 percentage revenue and EBITDA declines, respectively, caused by low-double-digit declines in attendance, with no offsetting capital expenditure and/or dividend reduction. 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
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008