MOODY'S RATES PROPOSED CARMIKE TRANSACTION - SR. SEC. BANK FACILITY B1; OUTLOOK CHANGED TO POSITIVE
Approximately $600 million of debt securities affected
New York, April 29, 2005 -- Moody's Investors Service rated Carmike Cinemas, Inc.'s (Carmike)
proposed senior secured bank facility B1, affirmed the B2 senior
implied rating, and changed the outlook to positive from stable.
The change in outlook mostly reflects the use of equity and free cash
flow to reduce long term debt coupled with expected improvement in credit
metrics arising from continued progress in operating performance.
Proceeds from the proposed facility will fund the approximately $66
million acquisition of George Kerasotes Corporation (GKC Theaters),
as well as replacing Carmike's existing revolving credit facility
and second lien term loan. A summary of Moody's ratings for Carmike
- Senior Implied Rating -- B2 (affirmed)
- $100 Million Senior Secured Revolving Credit Facility
due 2010 (undrawn) -- B1 rating assigned
- $170 Million Senior Secured Term Loan B due 2012 --
B1 rating assigned
- $185 Million Senior Secured Delayed Draw Term Loan due
2012 (undrawn) -- B1 rating assigned
- $50 Million First Lien Senior Secured Revolving Credit
Facility due 2008 -- B1 rating withdrawn
- $100 Million Second Lien Senior Secured Term Loan Facility
due 2009 -- B2 rating withdrawn
- $150 Million Senior Subordinated Notes due 2014 --
- Issuer Rating -- B3 affirmed
- Rating Outlook -- Raised to Positive from Stable
The B2 senior implied rating reflects high financial leverage (slightly
over 5 times pro forma the transaction and after adjusting for off balance
sheet leases); sensitivity to Hollywood's ability to consistently
produce compelling films; weaker margins and cash flow per screen
than its peers; integration risk as Carmike seeks to consolidate
the small-to-mid market theater industry; and a degree
of geographic concentration of cash flow.
The rating draws strength, however, from Carmike's strong
competitive position in its targeted smaller markets, attractive
concession margins, and management's financial discipline,
especially relative to its industry peers who have returned substantial
dividends to their shareholders.
The change in Carmike's outlook to positive from stable considers
Carmike's use of a combination of free cash flow and equity proceeds
to pay down slightly over $100 million of debt since 2002,
and Moody's expectations for future de-leveraging following
the proposed transaction. Carmike's rent-adjusted
leverage declined to the mid-4 times range from over 5 times in
early 2003. While adjusted leverage will return to slightly over
5 times pro forma for the transaction, expectations for free cash
flow growth, as well as Carmike's track record of improved
operating performance since its exit from bankruptcy, support the
outlook change to positive.
Movie theater attendance and resultant cash flow, for all operators,
depend on the quality of available films, thus operational challenges
facing Carmike include its average of 7.8 screens per theatre,
well below the industry average of 10.9, and a consequent
limitation on its ability to deliver a diversity of films to its viewers.
Carmike focuses its theatre operations in small- to mid-sized
communities with populations of fewer than 100,000, accordingly,
the company's per screen and per theatre attendance, revenue,
and EBITDA are the lowest among the rated theatre operators. The
GKC transaction represents expansion into Carmike's core small markets,
and Moody's believes management will restrict future growth initiatives
(either organic or through acquisition) to this field of expertise.
Execution risk nonetheless exists. Furthermore, the $185
million delayed draw term loan and the $100 million additional
capacity from the revolving credit facility provide the potential for
increased leverage as acquisition opportunities arise, although
Moody's anticipates Carmike would remain within the mid 5 times
rent-adjusted leverage range, at the inception of a transaction.
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 if film supply is good, attendance trends
will benefit from the improved asset base, in Moody's opinion.
Although the quarterly dividend instituted in the second half of 2004
will consume a modest portion of free cash flow (less than $10
million annually), Moody's believes Carmike will apply future
free cash flow to either expansion or debt reduction before increasing
dividends; this is a credit positive, particularly in an industry
prone to large shareholder rewards that often come at the expense of debt
The positive outlook reflects Moody's expectation that Carmike will
successfully integrate GKC and continue to generate positive and growing
free cash flow after cash interest, capital expenditures,
cash taxes, dividends, and modest required term loan amortization
(less than $2 million annually). If Carmike performs in
line with its current guidance, with adjusted leverage projected
to remain mostly under 5 times, Moody's would likely consider
raising the company's ratings over the next 12 to 18 months.
Meaningful deviation from plan and/or a significant deterioration in operating
trends due to industry- or company- specific events would
likely drive the rating down or result in a reversion to a stable outlook.
In analyzing Carmike, Moody's assesses both leverage and interest
coverage on an as reported and a rent-adjusted basis. (Debt
is adjusted for operating leases using both a net present value approach
and the more conventional 8 times rent expense approach prevalent in the
theater sector.) Pro forma for the transaction, Carmike's
adjusted debt leverage, on either a net present value or an eight
times rent basis, is slightly above 5 times, lower than some
of its higher rated industry peers, but Carmike lacks the scale
and diversity advantages of larger operators such as Regal. Furthermore,
Carmike's adjusted EBITDA less capital expenditures coverage of
adjusted interest of 1.4 times is low relative to its peers.
The senior secured bank facility is notched up to B1 from the B2 senior
implied. 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 senior implied
rating and the Caa1 senior subordinated notes reflects that tranche's
contractual and effective subordination to all other existing debt (including
leaseholder claims), but also the benefits of an upstream guarantee.
Carmike Cinemas is one of the country's largest motion picture exhibitors
with 2,188 screens and 282 theatres as of December 31, 2004.
The company maintains its headquarters in Columbus, Georgia.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service