-- U.S.-based theater advertising company National CineMedia LLC is
amending and extending its senior secured term loan.
-- We are assigning the amended and extended facilities a 'BB-'
issue-level rating and a '3' recovery rating, the same as the existing term
-- The stable rating outlook on the corporate credit rating reflects our
expectation that National CineMedia Inc. will maintain leverage in the
high 3x to 4x range over the intermediate term, despite its aggressive dividend
On Nov. 9, 2012, Standard & Poor's Ratings Services assigned its 'BB-'
issue-level rating (the same as our 'BB-' corporate credit rating on the
company) to Centennial Colo.-based National CineMedia LLC's amended and
extended senior secured credit facilities. The facilities consist of a $265
million term loan due 2019, a $110 million revolving credit facility due 2017,
and a $14 million revolving credit facility due 2014 (already rated). We also
assigned a '3' recovery rating to the term loan and revolving credit facility
due 2017, indicating our expectation of meaningful (50% to 70%) recovery for
lenders in the event of a payment default. The proposed transaction extends
the maturity of the company's term loan B to 2019 from 2015.
We affirmed all other related ratings on the company, including the 'BB-'
corporate credit rating. The rating outlook is stable.
We analyze National CineMedia Inc. (NCM Inc.) and operating subsidiary
National CineMedia LLC on a consolidated basis.
The rating on National CineMedia Inc. reflects Standard & Poor's expectation
that NCM Inc. will maintain its strong EBITDA margin, its conversion of EBITDA
to free operating cash flow, and its leverage in the high 3x to 4x range over
the intermediate term, despite its aggressive dividend policy. We consider the
company's business risk profile as "fair" (as per our criteria), based on its
historically strong EBITDA margin and good market position. A high dividend
payout and minimal cash retention by operating subsidiary NCM LLC underpin our
view of the company's "aggressive" financial risk profile, despite its
relatively moderate leverage.
Operating subsidiary NCM LLC is the larger of two competing in-theater
advertising networks in North America. Our assessment of NCM Inc.'s "fair"
business risk stems from the company's high EBITDA margin and long-term
contracts with the three largest national movie exhibitors in the U.S.:
American Multi-Cinema Inc., a wholly owned subsidiary of AMC Entertainment
Inc.; Regal Cinemas Corp., a wholly owned subsidiary of Regal Entertainment
Group; and Cinemark USA Inc., a wholly owned subsidiary of Cinemark Holdings
Inc. These contracts provide significant barriers to entry to new entrants in
addition to revenue visibility. A key risk is that once NCM Inc. is able to
sell all or nearly all of its inventory, declining theater attendance could
hurt performance, because national advertisers pay NCM based on a cost per
thousand viewers (CPM) advertising pricing metric. We believe that there is
limited pricing upside, given in-theater advertising's already high rates,
which are roughly comparable to broadcast television. Unlike many other
advertising media, NCM Inc. has minimal ability to expand its ad inventory
and, therefore, relies on inventory utilization, ad rate increases, and
winning theater chain clients from its key competitor, to generate revenue
Under our base-case scenario, we expect revenue will be flat to up at a low
single-digit percent rate in the fourth quarter of 2012, reflecting robust
local advertising growth and weaker national advertising demand. We expect
that EBITDA will be flat to down at a low double-digit percent rate because of
higher access fees paid to theaters as a result of the continued expansion of
the company's screen count. In 2013, we expect revenue and EBITDA to rise at a
low- to mid-single-digit percentage rate. We expect NCM Inc.'s attendance base
to increase at a low-single-digit percentage rate as it continues to expand
its screen count, albeit at a slower rate. We also expect NCM Inc. to continue
expanding its inventory utilization and rate as a result of expanding the
number of advertising clients. We estimate NCM Inc.'s EBITDA margin will
decline about 200 basis points in the fourth quarter as a result of higher
expenses and remain relatively flat, in the high 40% area in 2013.
In the third quarter of 2012, revenue and EBITDA increased 5.7% and 6.4%,
respectively, because of an increase in inventory utilization and higher
advertising rates, partly offset by higher theater access fees. For the 12
months ended Sept. 27, 2012, the EBITDA margin was strong at 48%--roughly even
with the prior-year period. Debt to EBITDA for the 12 months ended Sept. 27,
2012, pro forma for the proposed amendment, increased to 4.0x from 3.4x in the
prior-year period, because of higher debt balances. Debt will increase by
about $40 million as a result of the proposed amendment, with the majority of
the proceeds going to pay fees and to unwind interest rate swaps. Leverage is
in line with the 4x to 5x range of debt leverage that we regard as indicative
of an "aggressive" financial risk profile, and the company distributes nearly
all of its free cash flow to shareholders and its founding members as long as
leverage remains below 6.5x. EBITDA coverage of interest declined to 3.9x from
4.9x in the prior-year period as a result of higher interest expense on the
notes issued in April 2012 and higher debt balances. We expect debt leverage
to remain in the high 3x to 4x range, based on our outlook for revenue and
EBITDA growth over the next year.
NCM Inc. converted half of EBITDA into free operating cash flow (one-time swap
termination fees) in the 12 months ended Sept. 27, 2012. Distributions are
high, at about 56% of EBITDA for the 12 months ended Sept. 27, 2012. Excluding
swap termination fees, discretionary cash flow was slightly negative by about
$13 million (or 6% of EBITDA) for the 12 months ended Sept. 27, 2012, because
of working capital becoming a greater use of cash flow. We expect NCM LLC to
continue to distribute more than 90% of its free operating cash flow to its
founding members and its parent company's shareholders, subject to a leverage
ceiling of 6.5x. We expect the operating subsidiary to generate good free
operating cash flow, but that dividends will result in minimal discretionary
cash flow (less than 10% of EBITDA) and cash.
Liquidity is "adequate" to cover NCM Inc.'s operating and capital needs over
the next 12 to 18 months, in our view. We believe any further
shareholder-favoring initiatives could weaken the liquidity profile. Our
assessment of NCM Inc.'s liquidity profile incorporates the following
expectations and assumptions:
-- We expect NCM Inc.'s sources of liquidity over the next 12 to 18
months will exceed uses by over 1.2x.
-- We expect that liquidity sources would remain positive, even with a
15% to 20% EBITDA decline.
-- We expect NCM Inc. can maintain covenant compliance, even if EBITDA
-- NCM Inc. can absorb high-impact, low-probability adversities by
reducing its distributions to equity holders.
-- We believe the company has good relationships with its banks and a
satisfactory standing in the credit markets.
Liquidity sources include cash balances of $8 million as of Sept. 27, 2012, at
NCM LLC, our expectation of healthy free operating cash flow, and borrowing
access under the company's revolving credit facility. The company has access
to $94 million under the upsized $119 million revolver. Uses of liquidity
include dividends and distributions to NCM Inc.'s founding members and NCM
Inc., and working capital requirements and capital expenditures of about $30
million to $40 million, combined. We believe that NCM will generate funds from
operations of roughly $170 million to $190 million in 2012 and 2013 (before
one-time swap termination fees). We expect NCM Inc. to distribute virtually
all of its free operating cash flow to founding members and to NCM Inc.,
resulting in minimal discretionary cash flow.
NCM had roughly a 55% EBITDA cushion against its senior debt leverage covenant
on Sept. 27, 2012. We expect it to maintain sufficient covenant headroom over
the intermediate term.
We rate National CineMedia LLC's senior secured credit facilities and senior
secured notes 'BB-' (the same as the corporate credit rating) with a '3'
recovery rating. The '3' recovery rating reflects our view that lenders would
experience meaningful (50% to 70%) recovery in the event of a payment default.
We rate the company's senior unsecured notes 'B' (two notches below the
corporate credit rating) with a recovery rating of '6', indicating the
likelihood of negligible (0% to 10%) recovery. (For the complete recovery
analysis, see Standard & Poor's recovery report on rate National CineMedia,
published May 2, 2012, on RatingsDirect.)
The stable rating outlook reflects our expectation that NCM Inc. will continue
generating good cash flow from operations and maintain leverage in the high-3x
to 4x area over the next year. We also believe it will maintain an adequate
margin of compliance with covenants.
We could lower our rating if adjusted debt to EBITDA rises above 4.5x because
of a more aggressive policy that increases debt through a debt-financed
acquisition or higher dividends. A downgrade would be especially likely if
further EBITDA declines or a narrowing of liquidity are accompanied by more
aggressive financial policies such as a high single-digit percentage rate
revenue decline and a high-teens percent EBITDA decline that are not offset by
reductions in dividend distributions to founding members and NCM Inc. could
raise leverage, resulting in a downgrade.
Although unlikely over the intermediate term, we could raise our rating if
there is a deliberate move by management and shareholders to improve and
maintain higher liquidity, especially at NCM LLC, by reducing the amount of
cash flow distributed to shareholders and the founding members.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade
Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Chris Valentine's temporary telephone number is (646-300-4670)
National CineMedia LLC
National CineMedia Inc.
Corporate Credit Rating BB-/Stable/--
National CineMedia LLC
Senior Secured BB-
Recovery Rating 3
Senior Unsecured B
Recovery Rating 6
National CineMedia LLC
US$265 mil term B bank ln due 2019 BB-
Recovery Rating 3
US$110 mil revolver bank ln due 2017 BB-
Recovery Rating 3
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left