MOODY'S LOWERS CARMIKE CINEMAS' DEBT RATINGS - SR SEC TO B3 AND SR SUB TO Caa2; OUTLOOK STILL NEGATIVE
Moody's Investors Service lowered the debt ratings of Carmike Cinemas, Inc. (Carmike), including the company's $200 million issue of 9-3/8% senior subordinated notes (to Caa2 from B2), and its senior secured bank credit facilities totaling $275 million (to B3 from Ba3). Moody's also lowered Carmike's senior implied rating (to B3 from Ba3) and senior unsecured issuer rating (to Caa1 from B1), and maintained its negative outlook for all ratings. This concludes our review of Carmike's debt ratings which began March 2000.
The downgrades and negative rating outlook reflect the company's weak operating results and deteriorating credit profile following its material underperformance relative to original expectations, as well as Moody's expectations of continued financial strain and a difficult operating environment over the intermediate term and commensurate reductions in projected loss severity implicit in the revised ratings. Specifically, Moody's suggests that holders of the company's senior subordinated notes have experienced impairment of their expected recovery value against the same in the range of 20%-30% over the last year, with susceptibility to further erosion noted in the ongoing negative rating outlook.
Since our initial rating of the company's debt in January 1999, Moody's has remained concerned about Carmike's comparatively older theater base, as well as management's concerted shift from a predominantly acquisition-driven strategy to a new build growth model. Partially compensating for these concerns, however, Moody's had historically taken a measure of comfort in the relatively less leveraged balance sheet and more conservatively structured bond indenture and bank credit agreement of Carmike in comparison to its rated peer group, as well as the large number of non-competitive markets in which the company operated.
Recent results suggest that Carmike's theaters have been more adversely affected than anticipated by the heightened competitive environment and poor box office performance (from an exhibitor perspective) for the theater industry in general, nonetheless. Operating weakness has been noted at both Carmike's older and its more recently constructed theaters, suggesting that its "non-competitive" markets may be fairly competitive after all, as audiences appear to be driving farther distances to the newer plexes. Additionally, there is increasing evidence to confirm Moody's belief that Carmike remains more susceptible to box office risk given its lower-screened theaters, and the possibility that some of its newer builds may have been completed in less than optimal locations and/or were inappropriate construction projects to begin with. Carmike's liquidity position has subsequently been eroded by a material amount, and the company will likely need to complete additional sale-leaseback transactions (which Moody's has long viewed as nothing more than alternative financing, to the detriment of unsecured bondholders, with at most a short-lived benefit to enhance liquidity) to bridge any near-term cash shortfalls.
Carmike's run-rate lease-adjusted leverage has grown dramatically to 9.1x (note the lack of adjustment for what Moody's deems to be "recurring non-recurring" charges, which have become the norm for the entire sector) at the end of first quarter 2000, up from 6.3x at the comparable prior year period. Pre-rent cash flow coverage of forward interest and rents has declined materially to a breakeven 1.0x level, from 1.6x over the same period last year, leaving no capital available for investment or debt amortization. Although these levels still remain strained for even the revised ratings, Moody's does expect some near-term (albeit potentially short-lived) improvement. It is also noteworthy that Carmike's lease-adjusted debt-to-revenue of 2.1x remains in-line with its peers and at the low end of an arguably overleveraged sector overall, while lease-adjusted debt per screen ($359 thousand) and per theater ($2.3 million) also remain the lowest for the rated exhibitor universe (partially a function of the types of theaters and markets in which Carmike operates, but some comfort is taken, nonetheless, in that per screen leverage is low even in light of Carmike's less modern, lower screened theaters relative to it comps), while some positive EBIT is also present.
The company has announced that its formerly aggressive capital expansion program will effectively cease this year, which Moody's views as a near-term mitigant against the further weakening of its credit profile and an opportunity to potentially generate positive free cash flow by the end of the year. However, Moody's remains particularly concerned with the large number of theaters that need to be closed due to cash flow losses and/or diminimus returns, a situation which is exacerbated by Carmike's generally high average remaining lease terms for a material percentage of the same, and the very limited alternative usage for these sites in Moody's estimation. Moody's correspondingly believes that additional asset write-offs are needed and will likely be forthcoming over the next year, notwithstanding the company's recording of an already meaningful amount of theater impairment charges over the last few years. Moreover, the curtailment of capital spending could prove more problematic over time given the relatively old age of Carmike's theater circuit and the anticipated deferred maintenance issues that are likely to ensue, both of which Moody's suggests are beginning to be noted already in the company's fairly dramatic drop-off in attendance levels.
Carmike Cinemas is the third largest domestic motion picture exhibitor in terms of the number of screens operated, with 2,821 screens at 447 theaters located in 36 states at the end of the first quarter. The company maintains its headquarters in Columbus, Georgia.
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