Jan 14 - Fitch Ratings has assigned a 'B-'/'RR6' rating to Regal
Entertainment Group's (Regal) proposed senior unsecured note offering.
The notes will rank pari pasu with Regal's existing 9.125% senior unsecured
notes due 2018 ($525 million outstanding). Proceeds will be used for general
corporate purposes, including acquisitions. A complete list of ratings follows
at the end of this release.
The notes will be issued under a new indenture and covenants will be similar to
the 9.125% senior unsecured note indenture. Covenants include limitation on
consolidated debt (net interest coverage greater than 2x incurrence test),
limitation on restricted payments (a basket that increases based on, among other
factors, the excess of EBITDA over 1.7x interest expense) and limitation on
liens (standard carve-outs exist in addition to an incurrence test of 2.75x net
senior secured leverage). In addition, the indenture includes a change of
control provision that is triggered if any person (except for the Anschutz
Company and any of its affiliates) becomes the beneficial owner of 50% or more
of the voting stock of Regal. Other change of control triggers include a
majority change in the Board of Directors, the liquidation or dissolution of
Regal, and/or if all or substantially all of Regal's and its subsidiaries'
assets are sold. There are cross payment default/cross acceleration provisions
(among Regal and Regal Cinemas) in regard to debt in excess of $25 million.
The proposed note offering will increase Regal's leverage, however, Regal has
the financial flexibility to absorb the incremental leverage and maintain
current ratings. As of Sept. 30, 2012, pro forma for the proposed offering and
the recent acquisition of Great Escape theater circuit, Regal had approximately
$2.25 billion in debt, with lease-adjusted gross leverage at 5x and unadjusted
gross leverage at 4.4x.
As of Sept. 30, 2012, liquidity was made up of $251 million in cash ($495
million adjusting for the proceeds of the new notes) and $82 million in credit
facility availability (reduced by $3 million in letters of credit), under the
company's $85 million revolving credit facility due May 2015. Fitch calculates
September 2012 last 12 month FCF (after dividends) of $90 million.
Fitch expects cash deployment to be dedicated to acquisitions and return of
capital to shareholders.
Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value
of the company and, hence, 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 $1.7 billion, using a 5x
multiple and including an estimate for Regal's 20% stake in National CineMedia,
LLC of approximately $190 million. Based on this enterprise valuation, which is
before any administrative claims, overall recovery relative to total current
debt outstanding is approximately 71%.
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 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 'RR2' assigned to Regal Cinema's senior unsecured notes reflect an
expectation of 71% - 90% recovery. The 'RR6' assigned to Regal's senior
unsecured notes reflects the structural subordination of the notes and Fitch's
expectation for nominal recovery.
KEY RATING DRIVERS
--Fitch believes movie exhibition will continue to be a key promotion window for
the movie studios biggest/most profitable releases.
--Long-term, Fitch continues to expect that the movie exhibitor industry will be
challenged in growing attendance and any potential attendance declines will
offset some of the growth in average ticket prices.
--The ratings also incorporate the intermediate/long-term risks associated with
increased competition from at-home entertainment media, limited control over
revenue trends, the pressure on film distribution windows, increasing indirect
competition from other distribution channels (such as DVD, VOD, and the
Internet), and high operating leverage (which could make theater operators FCF
negative during periods of reduced attendance). In addition, RGC and its peers
rely on the quality, quantity, and timing of movie product, all factors out of
WHAT COULD TRIGGER A RATING ACTION
--Fitch anticipates that Regal, and other movie exhibitors, will continue to
consolidate. While not anticipated, a material debt-funded acquisition or return
of capital to shareholders that would raise the unadjusted gross leverage beyond
4.5x could have a negative impact on the rating. In addition, meaningful,
sustained declines in attendance and/or per-guest concession spending, which
drove leverage beyond 4.5x, may pressure the rating as well.
--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
Fitch currently rates Regal and Regal Cinemas Corporation as follows:
--Issuer Default Rating (IDR) 'B+';
--Senior unsecured notes 'B-'/'RR6'.
Regal Cinemas Corporation
--Senior secured credit facility 'BB+/RR1';
--Senior unsecured notes 'BB/RR2'.
The Rating Outlook is Stable.