-- 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.
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.
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
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.
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
-- Because of its high cash balance and access to a currently undrawn
revolving credit facility, we believe Cinemark could absorb low-probability,
-- 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.
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
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
Cinemark Holdings Inc.
Cinemark USA Inc.
Corporate Credit Rating BB-/Stable/--
Cinemark USA Inc.
Senior Secured BB+
Recovery Rating 1
Recovery Rating 6
Cinemark USA Inc.
$100M loan due 2017 BB+
Recovery Rating 1
$700M notes due 2019 BB+
Recovery Rating 1
$400M notes due 2022 BB-
Recovery Rating 4
Upgraded; Recovery Rating Revised
Cinemark USA Inc.
Senior Unsecured BB- B+
Recovery Rating 4 5