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05 Aug 2004
MOODY'S ASSIGNS NEW RATINGS FOR PROPOSED AMC ENTERTAINMENT RECAPITALIZATION; EXISTING BANK AND SUB DEBT RATINGS RAISED FOR STRUCTURAL REASONS
Approximately $1.5 Billion of Rated Bank Credit Facilities and Public Notes Affected
New York, August 05, 2004 -- Moody's Investors Service assigned B2 ratings to the proposed fixed and
floating rate senior unsecured notes to be issued by Marquee Inc.
(Marquee), an entity that will ultimately be merged into (and whose
obligations will be assumed by) AMC Entertainment Inc. (AMC),
and a Caa1 rating to the proposed senior discount note issuance by Marquee
Holdings Inc. (Holdings), the prospective ultimate parent
company for the soon-to-be private AMC. Moody's also
assigned a B1 senior implied rating and a Caa1 issuer rating for Holdings,
while at the same time withdrew the former B1 and B2 senior implied and
issuer ratings, respectively, for AMC. Finally,
the existing senior secured bank credit facility and subordinated debt
ratings of B1 and Caa1, respectively, were raised to Ba3 and
B3 to reflect structural improvements related to their specific claims,
and notwithstanding some modest diminution of the perceived credit profile
for the consolidated entity proforma for the planned leverage buyout.
The rating outlook remains stable. A summary of Moody's rating
actions is as follows:
Marquee Holdings Inc. (Holdings)
- Senior Implied Rating - B1 (assigned)
- Issuer Rating - Caa1 (assigned)
- Rating Outlook (all ratings for the consolidated entity) -
- $170 Million (estimated gross proceeds) of New Senior
Discount Notes due 2014 - Caa1 (assigned)
Marquee Inc. (Marquee)
- $305 Million of New floating rate Senior Unsecured Notes
due 2011 - B2 (assigned)
- $150 Million of New fixed rate Senior Unsecured Notes
due 2012 - B2 (assigned)
AMC Entertainment Inc. (AMC)
- Senior Implied Rating - WR (withdrawn; formerly B1)
- Issuer Rating - WR (withdrawn; formerly B3)
- $175 Million Senior Secured Revolver due 2009 -
to Ba3 (from B1)
- $214.5 Million of 9.50% Senior Subordinated
Notes due 2011 - to B3 (from Caa1)
- $175 Million of 9.875% Senior Subordinated
Notes due 2012 - to B3 (from Caa1)
- $300 Million of 8.00% Senior Subordinated
Notes due 2014 - to B3 (from Caa1)
The rating actions follow the recent announcement that affiliates of J.P.
Morgan Partners and Apollo Management, L.P. plan to
take AMC private by effecting a leveraged buyout LBO) of the company at
an approximate purchase price of $2 billion (based on the stated
offer price of $19.50 per share and existing debt,
net of cash balances). The newly rated instruments will augment
the approximate $335 million depletion of existing cash balances
(most of it) and be used to finance the debt component of the LBO,
which has the combined effect of re-leveraging the new consolidated
balance sheet to about 6.73x from about 6.11x. The
balance of the purchase price will be funded by a combination of roll-over
and new equity contributions by the aforementioned sponsors who are taking
the company private. Proceeds from the new financings will be held
in escrow pending final approval of the transactions by shareholders,
after which Marquee will be merged with and into AMC.
The B1 senior implied rating for the consolidated entity is unchanged
from the former rating, notwithstanding the increased financial
leverage being taken on balance sheet proforma for the pending transactions.
This is because sufficient flexibility had already been incorporated into
the former rating to accommodate the assumed use of the company's excess
cash and/or incremental bank borrowings for the prospective purpose of
effecting further acquisitions, stock buybacks, preferred
stock repayments, dividends, and/or the like. However,
the aforementioned financial flexibility embedded in the former rating
has notably now been substantially depleted given the reversal of recent
trends toward a more fiscally conservative capitalization under which
the company has been operating, and specifically in consideration
of the noteworthy spike in debt.
The ratings continue to broadly reflect AMC's very high financial leverage
and low coverage of fixed costs, particularly in consideration of
its rent-heavy cost structure and the long-term nature of
its significant, generally non-cancelable off-balance-sheet
operating leases; the highly competitive markets in which AMC operates,
which raise concerns about the potential for competitive new build activities
and subsequent erosion of box office receipts; and concerns more
broadly about persistent structural overcapacity in the theatrical exhibition
industry. However, the ratings garner support from AMC's
modern theater circuit, with assets located primarily in high density
urban and suburban markets; above average demographics in AMC's market
footprint, which combined with the high quality circuit allows the
company to drive higher ticket prices than its peer group; and an
adequate liquidity profile, which Moody's expects will be enhanced
as cash balances are replenished over time with excess free cash flow
(albeit at a more modest rate than previously due to higher interest expense
associated with increased debt levels).
The stable rating outlook reflects Moody's expectation that the company
will maintain its good record of operating performance and at least meet
its targeted projections over the forward period. Additionally,
Moody's expects that free cash flow will be dedicated to building back
up the former cash reserve that is being depleted by the current LBO,
and that further leveraging of the balance sheet for prospective acquisitions
and/or otherwise will not occur. Given the aforementioned reduced
financial flexibility embedded in the B1 senior implied rating,
any operational shortfalls or deviations from capital spending plans would
likely result in a shift to a negative outlook or outright downgrade if
not addressed in fairly short order. A shift to positive outlook
would likely require the company to reduce leverage fairly substantially
to more prudent levels, and on a sustained basis.
As noted previously, the greatest concern for AMC is the increased
leverage and reduced financial flexibility associated with the proposed
transactions. At an estimated 6.7x by closing, leverage
as measured by lease-adjusted debt/EBITDAR will set the latest
new high for the theatrical exhibition sector. As highlighted in
Moody's June 2004 research commentary ("The U.S. Theatrical
Exhibition Industry - Healthier, But Not Yet Out Of The Woods"),
the rated movie theater companies have almost universally taken on noteworthy
incremental financial risk through a series of transactions (ranging from
much more aggressive dividend policies to outright sales and recapitalization
of whole companies) during recent times, and this is somewhat disconcerting
for the rating agency given the mature, competitive, low-margin
nature of the business coupled with the historical perspective of precipitous
cash flow declines brought on by only modest attendance declines during
the late-'90s restructuring period for the industry. For
AMC in particular, Moody's notes that the company's comparatively
modest free cash flow relative to its revenue base and its peer group
will not likely facilitate the ability to deleverage as rapidly as others,
mainly because its requisite rental payments are much higher and capital
spending for new theater construction is expected to resume at higher
levels than those of the last couple of years. As such, lease-adjusted
leverage is expected to remain above 6.0x for several years,
which contrasts with other rated theater operators that have recently
effected leveraged buyouts and which expect to undertake more meaningful
reduction in leverage over a shorter time frame. Moreover,
because the overwhelming majority of AMC's debt will consist of public
notes that will not be callable for several years, the company will
be somewhat limited in its ability to effect absolute reduction of debt
At the same time, the company's coverage of interest and rents by
pre-rent cash flow will remain very low at just 1.4x,
compared to an industry peer group average that is closer to about 1.8x.
Again, this lower coverage level results primarily from AMC's higher
reliance on more expensive, off-balance sheet operating lease
financing for almost all of its theaters, and less so but also due
to a higher proportion of high-coupon public debt (vs. lower
cost bank debt) in its capital structure than its rated peers.
While this remains essentially unchanged relative to historical coverage
levels for the company, it highlights AMC's comparatively more limited
flexibility should the company experience any sort of competitive or operating
difficulties, or a broader industry-wide box office slump.
The company's financial flexibility will be further constrained by reduced
liquidity as it plans to use most of its substantial cash balance to help
fund the buyout. While AMC will retain virtually full covenanted
access to its undrawn $175 million revolver, the use of the
cash removes a cushion that had previously given some assurance against
potential liquidity issues.
Finally, because AMC operates in the most demographically desirable
markets, new build activity, and the impact of the same on
AMC's operating results, remains somewhat of a concern. While
rampant new build activity such as that which occurred in the late nineties
seems to have largely moderated (and Moody's does not expect it to resume,
if for no other reason than that companies are more constrained these
days from a financial perspective), the strong box office environment
remains an inducement, and new construction has continued (albeit
at a slower pace). The effect of new competition obviously goes
hand-in-hand with the previously discussed concerns about
operational execution, and Moody's will carefully track the incidence
and effects of new competition on AMC going forward.
The effective upgrade of the senior secured bank debt rating to Ba3 reflects
the now more substantial layer of junior capital that will exist beneath
it, combined with the expectation that the revolver will not be
utilized that much (if at all), thereby affording reasonably good
coverage levels, even in a downside scenario, and notwithstanding
that lenders do not benefit from a first mortgage position on AMC's leased
properties (which would allow them to step in front of landlords and operate
the properties in a default situation). In the absence of such
a first mortgage position, security in the assets relates mostly
to in-theater equipment, which is deemed to be of more questionable
resale value. However, with a currently undrawn facility,
and more control via maintenance covenants and other restricted payment
provisions (note that most of the existing restricted payment basket will
be used up proforma for the proposed transactions), the bank group
is still deemed to be considerably better protected than bondholders in
a downside scenario. The B2 senior unsecured ratings for the Marquee
(and eventual AMC Entertainment) debt reflect its effective subordination
to the senior secured bank debt and other secured claims (i.e.;
capital leases) of the company. However, the notes do benefit
from subsidiary guarantees, as well as a fairly meaningful amount
of contractually and structurally subordinated debt (and private equity)
underneath it. The senior subordinated debt has also been upgraded
proforma for the assumed successful completion of the proposed offerings,
specifically as a result of the granting of upstream guarantees from the
company's operating subsidiaries which have notably been absent heretofore
and which Moody's has repeatedly pointed to as the sole reason for the
"extra" notch on this debt class relative to the core senior implied rating
and comparably structured subordinated debt claims for other exhibitors.
The B3 still reflects the effective and contractual subordination of this
debt to all secured and senior indebtedness of the company, nonetheless,
even though the former incremental structural subordination has now been
mitigated. The Caa1 rating for the senior unsecured discos of Marquee
Holdings reflects the equity-like risk of this debt class and their
structural subordination to all claims on AMC Entertainment, both
current and prospective.
AMC Entertainment is one of the largest movie theatre exhibition companies
in the United States, with 3,554 screens in 232 theaters located
mostly in the United States, and a smaller presence in several international
markets. The company maintains its headquarters in Kansas City,
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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