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TEXT-S&P raises Cinemark USA secured debt rating
April 26, 2012 / 8:16 PM / 5 years ago

TEXT-S&P raises Cinemark USA secured debt rating

Overview	
     -- We have updated our hypothetical default EBITDA assumption for U.S. 	
movie exhibitor Cinemark, resulting in a higher gross emergence enterprise 	
value than in our previous recovery analysis.	
     -- We revised our recovery ratings on the company's senior secured debt 	
and on its 8.625% notes. We also raised our issue-level ratings on this debt 	
in turn with our recovery rating notching criteria.	
     -- All other ratings on Cinemark, including the 'BB-' corporate credit 	
rating, were affirmed.	
     -- The stable rating outlook reflects our expectation that despite 	
secular risks facing the industry, Cinemark will continue to be profitable 	
over the near term and maintain credit metrics appropriate for the 'BB-' 	
rating.	
	
Rating Action	
On April 26, 2012, Standard & Poor's Ratings Services revised its recovery 	
rating on Cinemark USA Inc.'s senior secured debt to '1', indicating an 	
expectation of very high (90% to 100%) recovery for lenders in the event of a 	
payment default, from '2' (70% to 90% recovery expectation). We raised the 	
issue-level rating on this debt to 'BB+' (two notches higher than the 'BB-' 	
corporate credit rating on holding company parent Cinemark Holdings Inc.) from 	
'BB', in accordance with our notching criteria for a '1' recovery rating.	
	
At the same time, we also revised our recovery rating on the company's 8.625% 	
senior unsecured notes to '5', indicating our expectation of modest (10% to 	
30%) recovery for senior unsecured lenders in the event of a payment default, 	
from '6' (0% to 10%). We raised the issue-level rating on this debt to 'B+' 	
(one notch lower than the 'BB-' corporate credit rating) from 'B', in 	
accordance with our notching criteria for a '5' recovery rating.	
	
The recovery rating revisions reflect a change to our estimated EBITDA at 	
default and emergence valuation under our simulated default scenario. Although 	
our assumed distressed EBITDA multiple is unchanged at 5.5x, the change to our 	
default EBITDA assumption resulted in a higher gross emergence enterprise 	
value than in our previous analysis.	
	
All other issue-level ratings on Plano, Texas-based Cinemark's debt were 	
affirmed, as was our 'BB-' corporate credit rating on the company. The rating 	
outlook is stable.	
	
Rationale	
The 'BB-' corporate credit rating reflects our expectation that leverage and 	
capital spending will remain relatively high, but that Cinemark will continue 	
to be among the most profitable theater chains. We consider the company's 	
business risk profile to be "fair" (based on our criteria) because of the 	
company's 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 that Cinemark will continue to outperform 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 believe these dynamics will result in the company 	
achieving low-single-digit percentage revenue growth, on average, over the 	
long term, with mid-single-digit EBITDA growth and flat to slightly lower 	
leverage.	
	
Cinemark is the third-largest movie exhibitor in the U.S., by revenue, with a 	
significant 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 3-D ticket prices that we 	
expect will 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 to peers'. 	
	
Under our base-case scenario for 2012, we expect revenue and EBITDA to grow at 	
a mid-single-digit rate, with most of the growth driven by increased 	
international attendance, low-single-digit growth in ticket prices, and strong 	
domestic box-office performance in the first quarter of the year. We expect 	
international attendance to grow at a high-single-digit rate in 2012, 	
resulting from increased utilization and theater expansion. We envision flat 	
to minimally higher concession prices, and we assume stable concession sales 	
per patron volume. We expect the EBITDA margin to remain relatively stable, 	
and continue to outperform peers', despite moderate increases in concession 	
costs. We see ongoing risk to attendance from studios releasing films to 	
premium VOD platforms within the traditional theatrical release period.	
	
Cinemark has been outperforming other rated peers over the past couple of 	
years. For the fourth quarter ended Dec. 31, 2011, revenue increased 2% year 	
over year, while EBITDA decreased 1%, despite weak domestic box-office 	
performance and relatively tough comparisons in the company's international 	
markets. Total attendance increased 2%, with international attendance growth 	
more than offsetting a 3% decline in domestic attendance. The company's EBITDA 	
margin was relatively stable at 22% for 2011 and better than that of its peers.	
	
Cinemark's debt-to-EBITDA ratio (adjusted for leases) improved to 4.7x as of 	
Dec. 31, 2011, from 4.9x in 2010, largely as a result of higher EBITDA. 	
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 Standard & Poor's criteria. Adjusted EBITDA coverage of interest 	
remained unchanged at 2.7x over the same period, with EBITDA growth offsetting 	
higher interest expense related to recent refinancing activity. Our base-case 	
scenario indicates that the company's credit metrics could improve slightly in 	
2012, incorporating modest revenue and EBITDA growth assumptions and minimal 	
debt repayment.	
	
Capital spending for theater circuit expansion remains high, at 37% of EBITDA 	
in 2011, up from 33% in 2010. The company expects to increase capital spending 	
on new builds, mostly internationally, in 2012. As a result, we expect capital 	
spending to increase to about 50% to 55% of EBITDA this year. Cinemark's 	
dividend, which it raised 17% in November 2010, consumes an additional 20% of 	
EBITDA--relatively high for a capital-intensive business. Discretionary cash 	
flow could turn negative because of aggressive capital spending plans and 	
dividend payouts in 2012.	
	
Liquidity	
In our view, Cinemark has "strong" liquidity. Our assessment of Cinemark's 	
liquidity profile incorporates the following expectations and assumptions:	
     -- We expect the company's sources of liquidity over the next 18 to 24 	
months to exceed its uses by 1.5x or more.	
     -- We expect net sources would exceed uses, even if EBITDA were to 	
decline by 30%.	
     -- We expect the company would be able to maintain covenant compliance, 	
even if EBITDA declined 30%.	
     -- Because of the company's high cash balance and access to a currently 	
undrawn revolving credit facility, we believe it 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 Dec. 31, 2011, 	
was $521.4 million, and an undrawn $150 million revolving credit facility. A 	
portion of the $150 million revolver ($73.5 million) was extended to 2015. The 	
remaining $76.5 million matures in October 2012. We expect the company to 	
generate around $300 million to $350 million in funds from operations in 2012. 	
Working capital needs are modest. Expected uses of liquidity in 2012 include 	
about $250 million to $300 million of capital expenditures, around $100 	
million to $110 million of annual dividends, and minimal debt maturities. We 	
also believe that cash could be used to make acquisitions. Discretionary cash 	
flow could turn negative in 2012 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 $250 million.	
	
Annual debt principal payments are $9 million under the term loan, and there 	
are no maturities until 2016. Roughly half of the undrawn revolver matures in 	
October 2012, with the remainder maturing in March 2015. As of Dec. 31, 2011, 	
the company had an adequate cushion of compliance with its net senior secured 	
leverage covenant, which does not step down and applies only when the company 	
draws on its revolving credit facility.	
	
Outlook	
The rating outlook is stable. Despite the secular risks facing the industry, 	
we believe that Cinemark will continue to exhibit 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 the rating if the company continues to maintain its industry 	
leading EBITDA margin and reduces leverage below 4x. This would likely entail 	
the company's expansion plans supporting sustained attendance growth and 	
discretionary cash flow, as well as debt reduction. 	
	
We could lower the 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, revenue and EBITDA declines at a 	
low-double-digit percentage rate and mid-20s rate, respectively, caused by low 	
double-digit declines in attendance. 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	
     -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines for Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 	
Credits, May 13, 2008	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
	
Ratings List	
	
Ratings Affirmed	
	
Cinemark Holdings Inc.	
Cinemark USA Inc.	
 Corporate Credit Rating                BB-/Stable/--      	
	
Cinemark USA Inc.	
 Subordinated                           B                  	
	
Upgraded	
                                        To                 From	
Cinemark USA Inc.	
 Senior Secured                         BB+                BB	
   Recovery Rating                      1                  2	
 Senior Unsecured                       B+                 B	
   Recovery Rating                      5                  6

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