TEXT - Fitch affirms Regal Entertainment issuer default rating

Tue Feb 5, 2013 12:43pm EST

Related Topics

Feb 5 - Fitch Ratings has affirmed the 'B+' Issuer Default Rating (IDR) of
Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal
Cinemas). The Outlook is Stable. Please see a full list of ratings at the 
end of the release.

The ratings and Stable Outlook reflect the following considerations:

--Fitch believes movie exhibition will continue to be a key promotion window for
the movie studios' biggest/most profitable releases.

--Box office revenue grew solidly in 2012 (+6.5% according to Box Office Mojo) 
driven mostly by attendance growth.  The 2012 film slate was highlighted by The 
Avengers, The Dark Knight Rises, The Hunger Games, Skyfall, The Hobbit, and the 
Twilight Saga.

--Fitch recognizes that theater attendance is inherently volatile due to the 
quality of the film slate in any given year. The 2013 slate is promising with 
many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek 
Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World.  
However, due to the strong 2012 performance, which will be a challenge to match,
Fitch's current base case for 2013 is for attendance to decline in the low 
single digits.   

--For the long term, Fitch continues to expect that the movie exhibitor industry
will be challenged in growing attendance and any potential attendance declines 
will offset some of the growth in average ticket prices. The ratings factor in 
the intermediate/long-term risks associated with increased competition from 
at-home entertainment media, limited control over revenue trends, the pressure 
on film distribution windows, and increasing indirect competition from other 
distribution channels (such as VOD and other OTT services). Regal and its peers 
rely on the quality, quantity, and timing of movie product, all factors out of 
management's control.

--Fitch does not anticipate a significant decline in concession revenue per 
patron, but remains cautious that high-margin concessions (which represent 26% 
of Regal's total revenues and carry 87% gross margins), may be vulnerable to 
reduced per-guest concession spending due to economic cyclical factors or a 
re-acceleration of commodity prices. A slight deterioration in concession margin
is factored into the current rating.  While Fitch expects increased concession 
spend per guest, margins are expected to contract due to the lower margin 
premium menu offerings introduced by Regal and other theater circuits. 

--Fitch believes that Regal will continue to focus free cash flow (FCF) 
deployment toward build-out/expansion of theaters, acquisition of theater 
assets, and/or for shareholder-friendly activities. 

SENSITIVITY/RATING DRIVERS 

--Fitch weighs the prospective challenges facing Regal and its industry peers in
arriving at the long-term credit ratings heavily . Significant improvements in 
the operating environment (e.g. sustainable increases in attendance) and 
sustained deleveraging could have a positive effect on the rating, though Fitch 
views this as unlikely.

--Fitch anticipates that Regal, and other movie exhibitors, will continue to 
consolidate. While not anticipated, a material debt-funded acquisition or return
of capital to shareholders that would raise the unadjusted gross leverage beyond
4.5x could have a negative impact on the rating. 

--In addition, meaningful, sustained declines in attendance and/or per-guest 
concession spending which drove leverage beyond 4.5x could pressure the rating 
as well.

Liquidity

As of Sept. 27, 2012, liquidity consisted of $253 million in cash and $82 
million of availability under Regal Cinemas' $85 million revolving credit 
facility due May 2015. There are no significant maturities until 2017 when the 
term loan facility comes due. 

Fitch-calculated FCF for latest 12 months ended September 2012 was $136 million.
Fitch expects 2012 FCF to be negative $50 million. Fitch's FCF calculation 
deducts both the $155 million special dividend and Regal's regular dividend. In 
2013, including its regular dividend payment, Fitch expects FCF to be roughly 
$50 million to $75 million. The company does not have any pension obligations.

Leverage

As of Sept. 27, 2012, pro forma for the $250 million Regal issuance in January, 
gross debt totaled $2.25 billion and was made up of:

--Regal Cinemas' $990 million secured term loans (due 2017);
--Regal Cinemas' $400 million unsecured notes (due 2019); 
--Regal's $525 million unsecured notes (due 2018); and 
--Regal's $250 million unsecured notes (due 2025). 

Fitch calculates Regal's pro forma consolidated lease adjusted gross leverage at
5.1x and unadjusted gross leverage at 4.6x. While pro forma unadjusted gross 
leverage is currently outside of Fitch's longer term parameters, Fitch forecasts
leverage to be below 4.5x at year-end 2012.  There is tolerance in the current 
rating for leverage to go above 4.5x for a short period of time due to 
fluctuations in the box office. 

Recovery

Regal's Recovery Ratings reflect Fitch's expectation that the enterprisevalue 
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 $1.7 billion, using a 5x multiple
and including an estimate for Regal's roughly 20% stake in National CineMedia, 
LLC of approximately $190 million. Based on this enterprise valuation, which is 
before any administrative claims, overall recovery relative to total current 
debt outstanding is approximately 75%.

The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's 
belief that 91%-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 $3.2 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 84% recovery for Regal Cinemas' senior 
unsecured notes (equal in ranking to the rejected operating leases), which maps 
to an 'RR2' Recovery Rating. The 'RR6' assigned to Regal's senior unsecured 
notes reflects the structural subordination of the notes and Fitch's expectation
for zero recovery.

Fitch has affirmed the following ratings:

Regal

--IDR at 'B+';
--Senior unsecured notes at 'B-/RR6'.

Regal Cinemas
--IDR at 'B+';
--Senior secured credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.
The Rating Outlook is Stable.
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.