Fitch Affirms Regal's IDR at 'B+' & Upgrades Notes to 'B+/RR4'; Outlook Stable

Thu Mar 13, 2014 10:56am EDT

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(The following statement was released by the rating agency) NEW YORK, March 13 (Fitch) Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas) at 'B+'. Fitch has also upgraded the issue ratings of Regal to 'B+/RR4'. All other issue ratings have been affirmed. The Outlook remains Stable. A full list of rating actions follows at the end of this release. On Feb. 25, 2014, Regal tendered for any and all of its $311.4 million 9.125% senior notes due 2018 and the $400 million of Regal Cinema's 8.625% senior notes due 2019 ($711.4 million in total debt tendered). Simultaneously, Regal launched a new bond offering to fund the tender. On March 11, 2014 Regal closed its new bond offering, $775 million of 5.75% senior notes due 2022, and announced that it had received early tenders for 71% and 89% of Regal's and Regal Cinema's senior notes, respectively. In addition, Regal announced that any notes not tendered by March 25, 2014 will be called for redemption at 100% plus a make-whole premium. The redemption of the remaining notes is expected to occur on April 10, 2014. The 'B+' rating for Regal's notes reflects the improved recovery prospects following the planned note redemptions. Due to Regal's debt being structurally subordinated to Regal Cinemas debt, future issuance of debt by Regal Cinemas would pressure the 'B+/RR4' issue ratings. KEY RATING DRIVERS Regal'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. Despite a strong comparison with the 2012 industry box office, 2013's film slate delivered positive growth in box office revenues, up 0.8%, according to Box Office Mojo. Attendance declines of 1.3% were offset by a 2.1% increase in average ticket price. This will pose a tough comparison year in 2014. However, as in the past few years, there are many high-profile sequels that have a strong likelihood of box office success. The releases of 'Captain America: Winter Soldier', 'The Amazing Spider-Man 2', 'X-Men: Days of Future Past', 'Transformers: Age of Extinction', 'The Hunger Games: Mockingjay Part 1', and 'The Hobbit: There and Back Again', headline a strong film slate. Fitch believes the film slate will support industry-wide box office revenue levels with flat to low single digit declines in attendance and flat average ticket price. Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. While high margin concessions may be pressured, Fitch believes that in the long term, the exhibitors will benefit from delivering an improved value proposition to its patrons, and that premium food services/offerings will grow absolute levels of revenue and EBITDA. Fitch believes that Regal will continue to focus free cash flow (FCF) deployment toward expansion/build-out of theaters, acquisition of theater assets, and/or for shareholder-friendly activities. The ratings factor the intermediate-/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, collapsing film distribution windows and increasing indirect competition from other distribution channels (such as DVD, VOD, and OTT). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance and that any potential attendance declines will offset some of the growth in average ticket prices. In addition, Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control. LIQUIDITY AND LEVERAGE Regal's solid liquidity position is supported by $281 million of cash on hand as of Dec. 26, 2013 and $82.3 million availability under its $85 million revolver due 2017. FCF before dividend, as of Dec. 26, 2013, latest 12 month (LTM) was $235 million. Fitch expects pre-dividend FCF between $200 million and $300 million annually over the next two years. Fitch estimates approximately $135 million in annual dividends. Pro forma the refinancing, Regal has a manageable maturity profile with Regal Cinemas' term loans due in 2017 as its next material maturity: --Regal Cinemas' $978 million secured term loans (due 2017; amortize $10 million per annum); --Regal's new $775 million unsecured notes (due 2022); --Regal's $250 million unsecured notes (due 2023); --Regal's $250 million unsecured notes (due 2025). Fitch believes that Regal will have sufficient liquidity, including access to credit markets, to address its maturities. Fitch calculates unadjusted gross leverage of 3.9x (including NCM dividend), and interest coverage at 4.2x as of Dec. 26, 2013. RECOVERY Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value 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 $2.1 billion, using a 5x multiple and including an estimate for Regal's 20% stake in National CineMedia, LLC of approximately $200 million. 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 $3.3 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). The structurally subordinated senior unsecured notes at Regal are expected to have average recovery (31% - 50%), reflecting an 'RR4'. Any future issuance of debt by Regal Cinemas would pressure the 'B+/RR4' Regal issue ratings. RATING SENSITIVITIES Limited Rating Upside: Fitch heavily weighs the prospective challenges facing Regal and its industry peers in arriving at the long-term credit ratings. Significant improvements in the operating environment (sustainable increases in attendance) and sustained deleveraging could have a positive effect on the rating, though Fitch views this as unlikely. Negative Trigger: Fitch anticipates that the company, and other movie exhibitors, will continue to consolidate. While not anticipated, a debt-financed material acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 4.5x could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove leverage beyond 4.5x would pressure the rating as well. Fitch has taken the following rating actions for Regal and Regal Cinemas: Regal --IDR affirmed at 'B+'; --Senior unsecured notes upgraded to 'B+/RR4'from 'B/RR5'. Regal Cinemas --IDR affirmed at 'B+'; --Senior secured credit facility affirmed at 'BB+/RR1'; --Senior unsecured notes affirmed at 'BB/RR2'. The Rating Outlook is Stable. Contact: Primary Analyst Rolando Larrondo Senior Director +1-212-908-9189 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Timothy Lee Associate Director +1-312-368-3179 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. Applicable Criteria & Related Research: --'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013); --'Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector' (Sept. 19, 2013); --'Regal Entertainment Group' (Sept. 26, 2013); --'An Exclusive Preview: Fitch's 2013 Movie Exhibitor Outlook and Analysis' (April 12, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology – Effective 12 August 2011 to 8 August 2012 here Credit Encyclo-Media VI: Fitch’s Comprehensive Analysis of the U.S. Media & Entertainment Sector here Regal Entertainment Group here An Exclusive Preview — Fitch's 2013 Movie Exhibitor Oulook and Analysis here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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