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27 Jan 2006
MOODY'S ASSIGNS Ba3 BANK RATING AND Ba3 CORPORATE FAMILY RATING TO CENTURY THEATERS
Approximately $435 million of bank debt rated
New York, January 27, 2006 -- Moody's Investors Service assigned a Ba3 corporate family rating to Century
Theatres, Inc (Century) and a Ba3 rating to Century's proposed
senior secured bank debt. The proceeds of the $360 million
term loan will primarily fund a sizable dividend to its owners,
with a modest portion (approximately $50 million) used to repay
existing debt. The Ba3 corporate family rating reflects high financial
risk, sensitivity to product from movie studios, geographic
concentration of cash flows and a weak industry growth profile,
offset by management's strong track record, including expertise
in both theater operations and real estate management, and solid
liquidity. Moody's also assigned a stable outlook.
A summary of today's actions follows.
Century Theatres, Inc.
- Ba3 Rating assigned to Senior Secured Bank Debt
- Ba3 Corporate Family Rating assigned
- Stable Outlook
Syufy Enterprises, LP, a privately held real estate developer,
wholly owns Century. These ratings are Moody's first ratings on
Century, and Moody's does not rate Syufy Enterprises, LP.
Ratings reflect Century's financial risk, including high leverage
of approximately 5.2 times (pro forma for the transaction and as
per Moody's financial metrics, which adjust for operating leases),
thin fixed charge coverage, and modest free cash flow. Furthermore,
like all theater operators, Century remains vulnerable to the quality
and availability of film, and its geographic concentration poses
additional risk. Although this concentration could moderate with
Century's expansion plan, the new build program creates execution
risk, compounded by the increased leverage; management has
not historically operated with meaningful leverage.
Moody's anticipates Century's leverage immediately pro forma the
transaction will be high at approximately 5.2 times. Fixed
charge coverage will likely remain modest over the next several years
as the company expands fairly aggressively. Furthermore,
like all theater operators, Century operates in a mature industry
with low to negative organic growth potential, high fixed costs,
and increasing competition from alternative media. The company
also remains vulnerable to the studios to create product that will drive
the attendance that leads to cash flow from admissions and concessions.
Century derives approximately 60% of its revenue in California,
and, with approximately 45% of its theaters in the Bay Area,
lacks the cash flow diversity of its larger peers. Plans to add
between 150 and 200 screens over the 2006 to 2007 times period could improve
diversity, but the new build program presents execution risk.
Century benefits, however, from management's strong
track record. Century achieved EBITDA growth each year since 1996
despite weak industry box office performance (approximately flat EBITDA
in fiscal year ending September 2005 compared to the prior year).
In Moody's view Century undertook more rational screen growth than
many of its peers and employed modest leverage, contributing to
its ability to generate positive free cash flow in the majority of these
years (need to confirm -- we only have since '02, co
used $8 million in '02 but positive all other years).
Furthermore, Moody's believes Century benefits from the real
estate expertise of Chairmen Raymond and Joseph Syufy. An undrawn
$75 million revolving credit facility and expectations for modest
positive free cash flow provide solid liquidity, an additional credit
positive. Finally, advertising historically comprised a modest
portion of Century's total revenue relative to peers, and
Moody's believes some upside potential exists, particularly
as Century's theater circuit and resultant audience grows and as
the company rolls out digital projectors.
The stable outlook reflects expectations for a decline in leverage driven
by both EBITDA growth and debt reduction. Evidence of over-expansion
resulting in negative free cash flow after debt service and capital expenditures
could result in negative ratings action, as would weak operating
performance that resulted in an increase in leverage. Further significant
equity rewards could also pressure the ratings down. Upward rating
momentum is unlikely given the magnitude of improvement in credit metrics
necessary to merit a Ba2 rating.
Moody's considers Century's leverage of 5.2 times debt
(including operating leases)-to-EBITDA (as adjusted for
operating leases) high, particularly given the fixed costs and inherent
revenue volatility of the theater industry. Furthermore,
fixed charge coverage in the 2 times range (as measured by EBITDA less
capital expenditures to interest expense, using Moody's adjustments)
will be thin, and Moody's does not anticipate this ratio will
improve over at least the next several years due to Century's growing
capital expenditures to supports its new build program. The credit
facility contains a capital expenditures limit which does not, in
Moody's view, provide material protection to lenders.
Management's successful track record for return on theater investments
provides comfort, however, and Moody's believes that
management could curtail some of its planned expansion. Expectations
for modestly positive free cash flow after debt service and capital expenditures
also support the rating.
Moody's rates the bank debt Ba3, equivalent to the corporate
family rating. Bank lenders benefit from a first lien security
interest in the assets (including stock, equipment, inventory,
accounts receivable, license and contract rights), but a negative
pledge only on the owned and leased property (land and buildings).
In general, Moody's believes operating leases could provide
some cushion to bank lenders in bankruptcy, but not enough to warrant
a notch up from the corporate family rating for Century given that its
bank debt comprises about 50% of Century's total lease adjusted
debt. Furthermore, Century leases a meaningful portion of
its theaters from Syufy Enterprises, LP, the real estate developer
that owns the company, leading to the potential for conflict of
interest in Moody's view.
Century Theatres, Inc. is a regional theatrical exhibition
company operating 79 theaters with 1,001 screens located primarily
in the western half of the United States. The company maintains
its headquarters in San Rafael, California, and its annual
revenue is approximately $500 million.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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