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Rating Action:

MOODY'S ASSIGNS Ba3 RATINGS TO REGAL CINEMAS PROPOSED NEW BANK CREDIT FACILITIES; RATING OUTLOOK REVISED TO NEGATIVE PROFORMA FOR SECOND DECAPITALIZATION TRANSACTION IN LESS THAN A YEAR

26 Apr 2004
MOODY'S ASSIGNS Ba3 RATINGS TO REGAL CINEMAS PROPOSED NEW BANK CREDIT FACILITIES; RATING OUTLOOK REVISED TO NEGATIVE PROFORMA FOR SECOND DECAPITALIZATION TRANSACTION IN LESS THAN A YEAR

Approximately $3 Billion of Debt and Bank Credit Facilities (Current and Former) Affected

New York, April 26, 2004 -- Moody's Investors Service assigned Ba3 ratings to the proposed new senior secured bank credit facilities being arranged for Regal Cinemas Corporation (RCC or Regal), a wholly owned subsidiary or Regal Entertainment Group (RGC). Concurrently, Moody's withdrew its Ba2 ratings for RCC's existing bank credit facilities, which will be refinanced in their entirety with proceeds drawn under the new term loan. Moody's also withdrew its B2 ratings for RCC's two issues of senior subordinated notes, which have already been tendered for by the company and will be redeemed with proceeds (also) from the new term loan. Finally, Moody's changed the rating outlook for the company to negative from stable given the incremental financial risk being absorbed by creditors in favor of shareholders proforma for the planned (second) special dividend payment, which will also be financed by most of the remaining net proceeds from the new term loan. A summary of Moody's ratings actions follows.

Regal Entertainment Group (RGC)

- $240 Million of 3-3/4% Senior Unsecured Convertible Notes due 2008 - B3 (confirmed)

- Senior Implied Rating - Ba3 (confirmed)

- Issuer Rating - B3 (confirmed)

- Rating Outlook - Negative (changed from Stable)

Regal Cinemas Corporation (RCC)

- $100 Million Senior Secured Revolver due 2009 - Ba3 (assigned)

- $1.65 Billion Senior Secured Term Loan B due 2010 - Ba3 (assigned)

- $145 Million Senior Secured Revolver due 2007 - WR (former Ba2 rating withdrawn)

- $540 Million Senior Secured Term Loan due 2008 - WR (former Ba2 rating withdrawn)

- $350 Million of 9-3/8% Senior Subordinated Notes due 2012 - WR (former B2 rating withdrawn)

Moody's rating actions, and particularly the shift to negative outlook, follow Regal's announcement that it plans to pay an additional $710 million special dividend to shareholders, the second such dividend of this magnitude within just the past year. The company continues to pay out more in dividends than it generates in cash, and this second "extraordinary" dividend is additive not just to the first, but also to growing regular quarterly dividend payments. The willingness of management and the Board of Directors to use significant amounts of incremental debt to effect this fiscal policy highlights yet again that higher financial leverage and correspondingly higher underlying risk will be tolerated to enhance returns for equity holders. While Moody's does not necessarily take issue with the return of excess capital generated by the business or held in cash (in the absence of a higher return opportunity) to shareholders, the increasingly regular assumption of more long-term debt to finance much greater than what would otherwise be more fiscally prudent payout levels puts creditors at greater risk. In this regard, though, it is noteworthy that a considerable amount of cushion has historically been embedded in the company's ratings since its restructuring in order to accomodate this higher perceived risk tolerance level, which certainly exceeds that which has otherwise been evidenced on balance sheet (or by the markets in terms of yield) in recent periods. As such, this second dividend recapitalization can be absorbed within the parameters of the current rating levels, but only after another good year of operating performance, and even then only marginally so, with very limited incremental financial flexibility remaining. Proforma for the current transaction, the distinction between the credit profiles of Regal and its still lower-rated theatrical exhibition peers has been considerably diminished. The negative outlook suggests that future weakness in operating performance and/or an outsized acquisition financed with debt could put downward pressure on the company's ratings, with notably less cushion available to absorb potential short-term market disturbances given its diminished liquidity profile.

The Ba3 senior implied rating continues to reflect the speculative characteristics of the company, including (i) high financial leverage and modest coverage of interest, dividends and rents; (ii) execution and financing risk associated with management's desire to grow further in size, whether through new build activities or acquisitions; and (iii) the mature and highly competitive nature of the theatrical exhibition industry more broadly, which operates with heavy fixed costs and thin margins, and continues to have excess capacity and remain wholly reliant on a fairly small group of Hollywood studios for "good" film product in order to drive box office attendance and, ultimately, concession sales. The rating garners support, however, from (i) consistently strong operating performance since emerging from bankruptcy and as anticipated in future periods, with free cash flow $160 million or more (even in consideration of the higher interest expense burden and dividends) expected to be available to replenish the company's liquidity position; (ii) the high quality of Regal's relatively modern, upgraded theatre base, which correlates to good underlying asset value; and (iii) good access to the capital markets, as evidenced by both the proposed transaction (assuming its successful completion) and the large equity cushion that still remains beneath the company's rated obligations.

The ratings for the company's individual debt instruments further reflect their relative ranking in the consolidated capitalization and the specific terms and conditions governing the same. Investors will note that the Ba3 ratings for the new senior secured bank credit facilities are not notched-up from the senior implied rating, in contrast to those for the outstanding bank credit facilities which are being refinanced. In light of the considerably increased size of the new facilities, constituting a large majority of Regal's total debt capital structure, Moody's felt that a distinction between the senior secured rating and the senior implied rating was no longer warranted. The B3 senior unsecured rating for the convertible notes of RGC reflect their holding company status in the absence of upstream subsidiary guarantees, which subjects these claims to very junior levels just above the company's common equity given their structural subordination to all obligations of RGC's subsidiaries, and not just their effective subordination to the aforementioned sizeable senior secured claims.

The negative rating outlook reflects Moody's belief that ratings may need to be lowered if the company is unable to execute in accordance with expectations or, in the event of the same, does not cut its dividend (which Moody's deems as highly unlikely) and/or affects a large, debt-financed acquisition, some combination or all of which may be increasingly likely given the planned releveraging of its balance sheet. Specifically, incremental downward rating pressure could be expected by investors if leverage and/or coverage levels approached 5.5x and 1.6x, respectively. If, however, management can resume its higher revenue and cash flow growth, reversing the noted slowdown of late (on an adjusted, organic basis) given attendance and per capita concession declines, remain disciplined with respect to acquisition financing and purchase prices paid, and stabilize or grow free cash flow (thereby replenishing liquidity and rating cushion), the ratings could stabilize over the interim period. Upward rating momentum is not anticipated over the near-term rating horizon.

In analyzing Regal, Moody's notes that proforma for this transaction consolidated financial leverage (Adjusted Debt/EBITDAR) will rise to 5.1x, from 3.8x previously. Cash balances will be depleted from approximately $300 million to approximately $50mm, although the company will have full access to its proposed new undrawn $100 million revolver. Proforma coverage of interest plus rent plus quarterly dividends continues to be somewhat weak at about 1.8x as expected, principally given the sizeable dividend payouts and notwithstanding the relatively inexpensive (from an interest rate perspective) debt service costs. While the company is expected to continue to generate fairly robust free cash flow equal to about 8% of gross debt (albeit considerably lower on an adjusted basis for the capitalization of off-balance-sheet operating lease obligations), higher absolute interest costs stemming from much larger bank debt outstandings, coupled with a recently increased quarterly dividend, will serve to reduce this number further. Of note, Moody's does take some measure of comfort in the re-instituting of a 50% excess cash flow sweep covenant as embedded in the new bank credit agreement, a feature that had been removed via amendment to Regal's previous credit agreement last year.

Regal Entertainment Group is the parent company of Regal Cinemas and United Artists and is the largest domestic motion picture exhibitor with 6,045 screens in 550 theaters, inclusive of the United Artists, Edwards and (partial) Hoyt's chains. The company maintains its headquarters in Centennial, Colorado, with additional facilities in Knoxville, Tennessee.

Mark Gray
Managing Director
Corporate Finance Group

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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