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Rating Action:

MOODY'S RATES PROPOSED CARMIKE TRANSACTION - SR. SEC. BANK FACILITY B1; OUTLOOK CHANGED TO POSITIVE

29 Apr 2005
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 follows.

- 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- $50 Million First Lien Senior Secured Revolving Credit Facility due 2008 -- B1 rating withdrawn

- $100 Million Second Lien Senior Secured Term Loan Facility due 2009 -- B2 rating withdrawn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 -- Caa1 (affirmed)

- 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 holders.

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.

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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