-- 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-'
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.
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
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
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.
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,
-- 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.
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
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
Cinemark Holdings Inc.
Cinemark USA Inc.
Corporate Credit Rating BB-/Stable/--
Cinemark USA Inc.
Cinemark USA Inc.
Senior Secured BB+ BB
Recovery Rating 1 2
Senior Unsecured B+ B
Recovery Rating 5 6