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Rating Action:

MOODY'S ASSIGNS Caa1 SENIOR IMPLIED RATING TO CARMIKE CINEMAS; RATING OUTLOOK IS POSITIVE

03 Jul 2002
MOODY'S ASSIGNS Caa1 SENIOR IMPLIED RATING TO CARMIKE CINEMAS; RATING OUTLOOK IS POSITIVE

New York, July 03, 2002 -- Moody's Investors Service assigned the following ratings for Carmike Cinemas, Inc. (Carmike):

- Senior Implied Rating - Caa1

- Senior Unsecured Issuer Rating - Caa3

The rating outlook is positive. Moody's notes that it does not currently rate the existing debt securities of Carmike, which would include its senior secured bank debt and senior subordinated notes.

The ratings reflect the company's very high financial leverage on a lease adjusted basis, even after accounting for a proposed secondary equity offering which is tentatively scheduled for later this quarter. The rating also reflects the company's current bank financing, which remains from the pre-bankruptcy period and contains a fairly rapid amortization schedule and a relatively high interest rate floor, as well as comparatively very weak financial covenant protection for investors given the substantial cushion to violation levels. Box office risk related to the ability of the studios to produce quality product is also a continuing concern, especially in light of Carmike's reliance on "blockbuster" films to drive its results and its need to be "smarter" at picking films due to lower average screen counts in its theatres. The ratings also reflect the company's relatively older theatre circuit and very limited alternative use thereof, although this is offset somewhat by the fact that Carmike operates principally in smaller, less competitive rural and suburban markets with less competition. Beyond the issues pertaining expressly to Carmike, Moody's notes its continued concern about the theatrical exhibition industry as a whole, which continues to suffer from persistent over capacity issues that are not expected to abate for several years.

The ratings draw support however, from the aforementioned smaller markets which the company operates in, resulting in a relatively small number of alternative forms of entertainment, as well as lower operating costs related to rent and labor in particular. The company has also benefited from its ability during bankruptcy to exit leases on under performing theatres, thereby boosting overall cash flow and allowing the company to leave markets where it faced excessive competition. In addition, the closure of over 130 theatres in bankruptcy has resulted in a sizeable inventory of theatre equipment which should offset some maintenance capital expenditures going forward. The company also expects to see a significant cash infusion in the near term as a result of an income tax refund and the sale of several properties, as well as the secondary equity offering.

The positive outlook reflects Moody's expectations about balance sheet strengthening in light of the company's planned equity issuance and other extraordinary cash flow producing events and asset monetization activities, the continuation of strong box office results over the balance of the year, and the anticipation of a newly structured bank credit facility which should contain more favorable amortization and interest rate terms but also stronger covenant protection for investors. However, Moody's cautions investors that in spite of having one of the highest proportions of fee owned properties in the industry, and even after jettisoning approximately one third of its properties in bankruptcy due to under performance, Carmike is still the most highly leveraged company on a lease adjusted basis within its peer group. While the reorganization gave Carmike the opportunity to remove under-performing theatres, the company will need to demonstrate steady operating performance and cash flow growth, in addition to successfully completing the aforementioned deleveraging events, in order to drive upward ratings momentum. While the company, and the industry as a whole, are benefiting from the current strong box office performance, a reversal at the box office could put pressure on Carmike to meet its financial and operational obligations, and Moody's reminds investors that it was just such a reversal that resulted in the company's filing for bankruptcy protection in August 2000. Any relapse into financial distress by Carmike would likely also threaten the company's recently repaired critical vendor relationships with the studios, which were severely strained by the company's unanticipated Chapter 11 filing in 2000. The contemplated equity offering should begin to address the company's high leverage, but a sustained progression of deleveraging will be required before upward ratings momentum will be possible. Furthermore, any shortfall in operating performance or resumption of aggressive capital expenditure on new build activity or debt financed acquisition activity would put strong negative pressure on the ratings.

The ratings analysis for Carmike focused in large part on the company's highly leveraged balance sheet, and the comparatively lower asset valuations afforded to its theatre base as a result of the markets in which it operates and the qualitative characteristics of its theatres. The company's leverage at the end of the first quarter stood at 6.4x on a lease adjusted basis. Moody's looks at the lease adjusted debt on an industry-wide basis for comparative purposes as well as to account for the use of off-balance sheet financing, which varies considerably from exhibitor to exhibitor. Moody's acknowledges that the equity offering, in conjunction with the pending asset sales and tax refund, should provide some fairly meaningful balance sheet improvement in terms of debt reduction. In addition, the new bank facility should improve the company's total debt service coverage ratio once more definition on terms and timing become available. Beyond balance sheet issues, Moody's will look for the company to drive operating performance through cost controls and additional deleveraging through free cash flow growth, and, importantly, the ability to do so on a sustained basis, even if the box office turns down for some interim period.

Carmike Cinemas is one of the country's largest motion picture exhibitors with 2,275 screens and 312 theatres as of March 31, 2002. The company maintains its headquarters in Columbus, Georgia.

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

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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