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Rating Action:

Moody's affirms B1 ratings of Cineworld following Cineplex's acquisition announcement; outlook stable

18 Dec 2019

London, 18 December 2019 -- Moody's Investors Service, ("Moody's") has today affirmed the B1 corporate family rating (CFR) and the B1-PD probability of default rating (PDR) of Cineworld UK Holdco Limited ("Cineworld" or "the group"). Concurrently, Moody's has also affirmed the B1 ratings of the outstanding USD3,375 million and the EUR212 million of Senior Secured Term Loan B borrowed by Crown Finance US, Inc. and the USD462.5 million Senior Secured Revolving Credit Facility borrowed by Cineworld UK Holdco Limited. The outlook for both entities remains stable.

The rating action follows Cineworld's announcement that it has agreed to acquire Cineplex, leading cinema operator in Canada with a 75% box office market share. The acquisition implies an enterprise value for Cineplex of C$2.8bn (US$2.1bn) and a 2019E EBITDA multiple (including combination benefits) of 6.3x. The acquisition will be 100% debt funded and subject to Cineworld's and Cineplex's shareholder approval, and other regulatory approvals, completion is expected to occur by the end of H1 2020.

"Cineworld's B1 corporate family rating will be weakly positioned in the rating category following the acquisition of Cineplex. While the acquisition will be strategically positive, it will result in high leverage for Cineworld of 5.6x on a 2019E Moody's adjusted Gross Debt/ EBITDA basis, pro-forma for the transaction," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Cineworld.

"Although the box office will likely not be particularly strong in 2020, we expect the company to de-lever towards 5.0x by the end of 2020 mainly helped by EBITDA growth from synergy realization as well as some debt reduction", adds Ms. Dixit.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

De-leveraging in 2020 will be supported by EBITDA growth driven by synergy realization from Cineplex (USD120 million of synergies expected to be realized in 2020) and Regal (additional USD40 million in 2020) acquisitions supporting free cash flow generation, repayment of the USD202 million payment to dissenting Regal shareholders and some reduction in IFRS16 combined operating lease liability as the company plans to renew some leases on more favourable terms.

Performance of Cineworld in H12019 (revenue decline year-on-year of 11.1%) has suffered from weak film slate, closure of a number of non-performing sites as well as the absence of the unlimited subscription programme in the US. Moody's positively notes that the company has integrated Regal operations well and has upsized its 2020 synergy target by 90% to USD190 million including additional USD40 million of synergies targeted to be realized during the year. The closure of non-performing theatres is complete as well as major refurbishment work is well advanced and the company has also launched the unlimited programme in the US in July 2019. Q32019 has shown some signs of improvement coming from the launch of the unlimited subscription programme. Moody's expects 2019 to see revenue declines of 4.5%-5.5% for Cineworld (standalone excluding Cineplex) supported mainly by a strong December. While the film slate for 2020 does not appear to be particularly strong with fewer franchise sequels (and Avatar postponed to 2021), Moody's expects the company's overall revenue performance to improve over 2019 as the year was exceptionally impacted by the restructuring/ integration of Regal in H1.

With the acquisition of Cineplex, Cineworld will become the #1 player in North America. The enlarged business would have 11,204 screens with 951 sites. The Canadian market although closer to the US, remains comparatively underpenetrated in terms of admissions per capita, number of screens per million and average ticket price, providing room for growth. Future growth of Cineplex is likely to be supported by the opening of 2-3 theatres per year. Cineworld expects to realize USD130 million of synergies from this acquisition with USD120 million targeted to be achieved in year one. In this regard, Moody's takes good comfort from company's track record of delivering synergies associated with Regal's acquisition.

The B1 CFR assigned to Cineworld reflects its: (1) position as a leading international cinema exhibitor with strong market positions in its markets of operation. Scale is a powerful barrier to entry and should drive economies in film rental and concession procurement; (2) good geographical diversification with operations in 11 national markets; (3) the value inherent in control of the "first run window"; (4) the quality of the group's estate; (5) the resilience of the industry over many years, driven by the strong value proposition; and (6) the stated financial policy and experienced management team.

The CFR also reflects (1) the relative maturity of the industry in the UK and US, with declining attendance trends in the US; (2) the reliance on Hollywood major studio output and seasonality of earnings; (3) increasing alternative use of viewing online, including increase in streaming services from competitors, (4) the high gross starting leverage; and (5) the acquisition and integration risks associated with a deal the size of the Cineplex transaction.

Cineworld has adequate liquidity, despite some high sequential free cash flow volatility as a result of seasonal working capital swings, which are standard for the industry. As of 30 June 2019, Cineworld had a cash balance of USD173 million.

The company also has access to a USD462.5 million revolving credit facility (RCF; maturing in February 2023), which was drawn by USD250 million as of 30 June 2019. Moody's expects the drawings to be repaid by the year-end. The company's capital spending is likely to increase in 2020 as it will continue to open new sites and undertake substantial refurbishments of existing sites. The agency expects this capital spending to be financed with organic cash flow generation. Nevertheless, given the discretionary nature of these investments, capital spending could be reduced in case of underperformance. The RCF has a springing covenant, tested once utilisation exceeds 35%. This financial covenant is a maximum total net leverage of 5.5x, stepping down to 5.0x from and including June 30, 2021.

From a social risk standpoint, cinema operators will face changes in the way consumers access content due to the increasing competition from online streaming services, among others. From a governance perspective, Moody's notes the company's tolerance for large debt-funded acquisitions as demonstrated by the announced purchase of Cineplex which follows the acquisition of Regal Entertainment Group in 2018.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects the expectation that Cineworld will close the acquisition of Cineplex in accordance with the timetable outlined and on the terms announced.

The stable outlook incorporates Moody's expectations that the company will (1) deliver EBITDA growth and positive free cash flow sufficient to de-lever the business to below 5.25x in the next 12 months, (2) maintain its market share, and (3) refrain from further debt-financed acquisitions while keeping its existing financial policy.

WHAT COULD CHANGE THE RATINGS DOWN/ UP

Moody's could consider a negative rating action if (1) free cash flow turned negative, on a sustained basis; or (2) leverage (Moody's adjusted debt-to-EBITDA) does not reduce below 5.25x within 12 months. A negative rating action could also be considered if liquidity weakened, attendance deteriorated, margins fell, there was a loss in market share, or the company's scale or diversity was diminished. Moody's could also consider a downgrade if there were material and negative changes in competition, financial policy, capital structure, or the business model such that there is a material increase in credit risk.

Given the maturity of the industry in the UK and the US, limited opportunities for growth and the secular decline in US attendance, driven by the rise in competitive threats, an upgrade is unlikely in the next 18 months. However, Moody's could consider an upgrade if: (1) leverage (Moody's-adjusted gross debt/EBITDA) is sustained below 4.25x; and (2) debt coverage (Moody's-adjusted free cash flow/debt) is sustained above 5%.

LIST OF AFFECTED RATINGS

..Issuer: Cineworld UK Holdco Limited

Affirmations:

....Probability of Default Rating, Affirmed B1-PD

....Corporate Family Rating, Affirmed B1

....Backed Senior Secured Bank Credit Facility, Affirmed B1

Outlook Action:

....Outlook, Remains Stable

..Issuer: Crown Finance US, Inc.

Affirmation:

....Backed Senior Secured Bank Credit Facilities, Affirmed B1

Outlook Action:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Cineworld Group plc was founded in 1995 and listed its shares on the London Stock Exchange in May 2007. The Company has grown through expansion and by acquisition to become one of the leading cinema groups in Europe. Cineworld currently operates 9,498 screens across 786 sites in the US, UK and Ireland, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Israel.

The largest shareholder in Cineworld is Global City Holdings B.V., a Greidinger Family holding vehicle, which holds approximately 28% of the quoted equity. Pro forma for the Cineplex acquisition at 31 December 2018, the group had LTM revenues of USD5,933 million and EBITDA of USD1266 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gunjan Dixit
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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