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Rating Action:

MOODY'S CHANGES CARMIKE OUTLOOK TO NEGATIVE; AFFIRMS B2 CORPORATE FAMILY AND ALL OTHER RATINGS

27 Mar 2006
MOODY'S CHANGES CARMIKE OUTLOOK TO NEGATIVE; AFFIRMS B2 CORPORATE FAMILY AND ALL OTHER RATINGS

Approximately $555 million of debt securities affected

New York, March 27, 2006 -- Moody's Investors Service changed the outlook for Carmike Cinemas, Inc. (Carmike) to negative from positive following the announcement that Carmike does not expect to file its form 10k by the extended March 31 deadline. The change in outlook reflects Moody's expectation that an upgrade over the next 12 to 18 months is unlikely, due to both weaker than anticipated fundamental performance and concerns over financial reporting and accounting. Moody's would consider a reversion to a stable outlook following satisfactory resolution of Carmike's compliance issues and significant progress towards remediation of the internal control weaknesses. Moody's believes bank lenders are likely to waive Carmike's breach of its the credit agreement requirement to file timely financial statements, but Carmike's weak internal controls, including insufficient financial staff, raise concerns.

Moody's also affirmed Carmike's B2 corporate family rating, the B1 senior secured bank facility rating and the Caa1 rating on Carmike's senior subordinated notes. Carmike's ratings reflect high financial risk (including leverage of approximately 6.1 times); sensitivity to the film industry's ability to consistently supply compelling product; lack of scale; and concerns over the company's ability to hire and retain sufficient financial staff. Carmike's dominant position in its targeted smaller markets and strong concession margins somewhat mitigate these risks.

A summary of today's actions and Carmike's ratings follows:

Carmike Cinemas, Inc.

- Outlook: Changed to Negative from Positive

- B2 Corporate Family Rating Affirmed

- B1 Rating on Secured Bank Credit Facility Affirmed

- Caa1 Rating on Senior Subordinated Notes Affirmed

The negative outlook incorporates Moody's concerns over Carmike's delayed filing of its form 10k and the resultant need to seek waivers for the requirement to file timely financial statements from its bank lenders. Additionally, the weak internal controls, including continued challenges in hiring and retaining financial staff with the appropriate expertise, pose risk. Should Carmike resolve these accounting issues and demonstrate significant progress towards remediation of its internal control weaknesses, a stable outlook is likely. Due to Moody's concerns over staffing and control issues, as well as weaker than expected fundamental performance, a positive outlook is unlikely over the intermediate term. Moody's would consider a positive outlook if leverage (fully adjusted to capitalize operating leases as debt) fell below 5 times and evidence of a more robust financial staff existed.

Carmike's financial risk includes leverage of approximately 6.1 times, weak coverage of fixed charges, and negative free cash flow. Operational challenges include the dependence of movie theater attendance and resultant cash flow on the quality of available films. Carmike's average of approximately 8 screens per theater, below the industry average of approximately 11, limits its ability to deliver a diversity of films to viewers and magnifies this challenge. The company focuses its theater operations in small- to mid-sized communities with populations of fewer than 100,000; accordingly, its per screen and per theater attendance, revenue, and EBITDA are lower than most rated theater operators and its potential cash flow from high margin advertising is much lower than its peers. Finally, Carmike's incremental financing capacity (including a $185 million delayed draw term loan) provides the potential for increased leverage as acquisition opportunities arise, although Moody's believes management will restrict future growth initiatives to its core small market expertise.

Notwithstanding the relatively lower revenue and margin opportunities, Carmike's competitive position is reasonably well-protected, because its smaller markets are less likely to draw new entrants. Carmike also benefits from above average concession margins. Within the past five years, Carmike rebuilt or remodeled about 80% of its screens, and with better film supply, attendance trends will likely benefit from the improved asset base. While the quarterly dividend instituted in the second half of 2004 will consume a modest portion of free cash flow (less than $10 million annually), expectations for lower capital expenditures following the completion of the aforementioned theater upgrade initiative should yield free cash flow improvements. Additionally, Moody's believes management will apply future free cash flow to expansion or debt reduction before increasing dividends, a credit positive in an industry prone to large shareholder rewards that often come at the expense of debt holders.

Moody's considers Carmike's leverage of 6.1 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 is less than 1 time (as measured by EBITDA less capital expenditures to interest expense, using Moody's adjustments) and Carmike consumed cash flow after debt service and capital expenditures over the trailing twelve months through September 30, 2005, after generating only modestly positive cash flow in 2004.

The senior secured bank facility, which consists of a $50 million revolver (currently undrawn), a $170 million term loan and a $185 million delayed draw term loan (currently undrawn), is notched up to B1 from the B2 corporate family rating. The bank debt benefits from a fairly meaningful layer of junior capital beneath it, consisting of $150 million of senior subordinated notes and Carmike's public equity, as well as capitalized operating leases valued at approximately $400 million. The bank debt also benefits from its perfected first priority security interest in all Carmike assets. Carmike's owns approximately 25% of its theaters, which enhances the value of the collateral, in Moody's view. The two notch gap between the corporate family rating and the Caa1 senior subordinated notes reflects that tranche's contractual and effective subordination to all other existing debt (including leaseholder claims).

Carmike is one of the country's largest motion picture exhibitors with approximately 2,500 screens and 300 theaters as of September 30, 2005, and annual revenue slightly under $500 million. The company maintains its headquarters in Columbus, Georgia.

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

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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