TEXT - S&P rates Cinemark USA Inc

Tue Dec 4, 2012 11:46am EST

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Overview
     -- U.S.-based movie exhibitor Cinemark USA Inc., subsidiary of Cinemark 
Holdings Inc., is issuing $400 million senior notes due 2022 and is amending 
its senior secured credit agreement to put in place a $700 million term loan 
due 2019 and a $100 million revolving credit facility due 2017.
     -- The company will use proceeds to repay the existing term loan and to 
fund a portion of the acquisition of theaters from Rave Cinemas LLC.
     -- We assigned the proposed term loan and revolving credit facility our 
'BB+' issue-level rating with a recovery rating of '1'. We assigned the 
proposed senior notes our 'BB-' issue-level rating with a recovery rating of 
'4'. We are revising the recovery rating on the company's senior notes due 
2019 to '4' from '5', and consequently raising our issue-level rating on this 
debt to 'BB-' from 'B+'.
     -- The stable outlook reflects our expectation that despite secular risks 
facing the industry, Cinemark will continue to exhibit stronger profit 
measures than peers and leverage below 5.5x over the intermediate term.
 
Rating Action
On Dec. 4, 2012, Standard & Poor's Ratings Services assigned Cinemark USA 
Inc.'s proposed $700 million term loan due 2019 and $100 million revolving 
credit facility due 2017 a 'BB+' issue-level rating (two notches higher than 
the 'BB-' corporate credit rating on holding company Cinemark Holdings Inc.), 
with a recovery rating of '1', indicating our expectation for very high (90% 
to 100%) recovery for senior secured lenders in the event of payment default. 

We assigned the company's proposed senior notes due 2022 a 'BB-' issue-level 
rating (the same as the corporate credit rating), with a recovery rating of 
'4', indicating our expectation for average (30% to 50%) recovery for senior 
note lenders in the event of payment default.

At the same time, we are revising the recovery rating on the company's senior 
notes due 2019 to '4' from '5', and consequently raising our issue-level 
rating on this debt to 'BB-' from 'B+'.

All other ratings, including the 'BB-' corporate credit rating on Cinemark, 
were affirmed. The outlook is stable. Standard & Poor's analyzes Cinemark 
Holdings Inc. and subsidiary Cinemark USA Inc. on a consolidated basis.

Rationale
The corporate credit rating on Plano, Texas-based Cinemark Holdings Inc. 
reflects Standard & Poor's Ratings Services' expectation that leverage and 
capital spending will remain relatively high, but that Cinemark will continue 
to be among the most profitable theater chains, despite potential for some 
slowing of its long-term growth. We consider the company's business risk 
profile to be "fair" (based on our criteria) because of its 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 Cinemark to continue outperforming 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 score management and governance as "satisfactory" under our 
criteria, reflecting our view that, relative to peers, management has 
demonstrated a successful track record in expanding and managing its theater 
circuit. (See "General Criteria: Methodology: Management And Governance Credit 
Factors For Corporate Entities And Insurers," published Nov. 13, 2012, on 
RatingsDirect).

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 oversize 
theaters, which have excess capacity during slower 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 the full year 2012, we expect mid- to 
high-single-digit percentage revenue and EBITDA growth for the full year. We 
expect strong domestic box-office performance and higher international 
attendance levels should drive growth in the 2012 fourth quarter. For 2013, we 
expect revenue and EBITDA to grow at a mid- to high-single-digit percentage 
rate, driven by the revenue and EBITDA contribution from Cinemark's recent 
acquisition of theaters from Rave Cinemas, the addition of new theaters, and 
an increase in international attendance. 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.

Pro forma for the acquisition and refinancing, Cinemark's debt-to-EBITDA ratio 
(adjusted for leases) increases to 4.6x from 4.4x as of Sept. 30, 2012, due to 
higher debt balances. 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. Pro forma adjusted 
EBITDA coverage of interest was roughly even with the year-ago period at 2.7x. 
Our base-case scenario indicates Cinemark's leverage will remain in the mid-4x 
area in 2013.

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% projected 
EBITDA for the full year of 2012 and to about 45% to 60% of projected EBITDA 
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 payout.

Liquidity
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, pro forma for the transaction, consist of 
cash of roughly $480 million, and an undrawn $100 million revolving credit 
facility. As part of the proposed transaction, the company is replacing its 
$73.5 million revolving credit facility due 2015 with a $100 million revolving 
credit facility due 2017. We expect it to generate around $325 million to $375 
million in funds from operations in 2013. Working capital needs are modest. 
Expected uses of liquidity include around $250 million to $325 million of 
capital expenditures in 2013, around $100 million of annual dividends, and 
minimal debt maturities. We also believe some portion of cash balances could 
be used to make additional acquisitions. Under our base-case scenario, we 
expect discretionary cash flow 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 $259 million at Nov. 30, 2012.

Annual debt principal payments are $7 million under the new term loan, and 
there are no significant maturities until 2019. 

Cinemark's undrawn revolver matures in 2017. We expect Cinemark to maintain 
sufficient headroom with the covenant governing revolver usage. 

Recovery analysis

Outlook
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, and possibly its dividend payout, 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 and twenty percent 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
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
 
Ratings List

Ratings Affirmed

Cinemark Holdings Inc.
Cinemark USA Inc.
 Corporate Credit Rating                BB-/Stable/--      

Cinemark USA Inc.
 Senior Secured                         BB+                
   Recovery Rating                      1
 Subordinated                           B                  
   Recovery Rating                      6

New Rating

Cinemark USA Inc.
 Senior Secured
  $100M loan due 2017                   BB+                
   Recovery Rating                      1                  
  $700M notes due 2019                  BB+                
   Recovery Rating                      1                  
 Senior Unsecured
  $400M notes due 2022                  BB-                
   Recovery Rating                      4                  

Upgraded; Recovery Rating Revised
                                        To                 From
Cinemark USA Inc.
 Senior Unsecured                       BB-                B+ 
   Recovery Rating                      4                  5
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