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Rating Action:

Moody's downgrades AMC's CFR to Caa1 and rates new first-lien notes B3; outlook negative

17 Apr 2020

Approximately $4.5 billion of existing rated debt impacted and $500 million of new debt rated

New York, April 17, 2020 -- Moody's Investors Service ("Moody's") has downgraded AMC Entertainment Holdings, Inc.'s ("AMC" or the "company") Corporate Family Rating (CFR) to Caa1 from B3 and the Probability of Default Rating (PDR) to Caa1-PD from B3-PD. Concurrently, Moody's downgraded AMC's senior secured credit facilities to B3 from Ba3 (consisting of a $225 million revolving credit facility (RCF) and $1.99 billion outstanding senior secured term loan) and $2.3 billion of senior subordinated notes to Caa2 from Caa1. The senior secured debt was downgraded three notches based on the expected recovery value of the debt instruments given the numerous uncertainties and challenges facing the company over the short-run. Moody's also assigned a B3 rating to the proposed $500 million first-lien notes offering as announced in the company's press release dated 16 April 2020 [1]. The outlook is negative. This concludes the review that was initiated on 24 March 2020. The full list of affected ratings can be found at the end of this press release.

Net proceeds from the new first-lien notes will be used to enhance AMC's current liquidity and for general corporate purposes. The notes are expected to be pari passu with AMC's existing senior secured credit facilities and secured on a first priority basis to substantially all of the company's tangible and intangible assets, according to company's "Supplemental Disclosures on COVID-19 and Other Matters" dated 16 April 2020 [2].

RATINGS RATIONALE

The downgrade reflects AMC's higher than expected financial leverage in 2020 resulting from today's new first-lien notes offering. Additionally, based on Moody's projections, the increased interest expense from the incremental debt will result in substantially more negative free cash flow generation this year in the range of -3% of adjusted total debt. The rating incorporates governance risks, specifically the likelihood that leverage will rise significantly to the 9x-10x range over the next two years given the company's profitability and liquidity challenges resulting from the novel coronavirus (a.k.a. COVID-19) outbreak, as well as an increasingly untenable capital structure and likely balance sheet restructuring in the future absent a cash equity injection.

While AMC will enhance internal liquidity during this uncertain period stemming from the economic effects of the coronavirus pandemic, Moody's projects the incremental debt will increase pro forma financial leverage to 9.8x total debt to EBITDA (Moody's adjusted) in 2020. The higher leverage metric is also due to Moody's revised expectation for a longer reopening for about half of AMC's theatres, resulting in slightly lower EBITDA this year. It also considers that the company has fully drawn under both revolvers (US: $225 million; UK: GBP100 million) [3], which boosted cash levels but also increased debt and exhausted external liquidity sources. Based on AMC's 31 March 2020 cash balance as provided in its "Supplemental Disclosures on COVID-19 and Other Matters" dated 16 April 2020 [2] and including the net proceeds from the notes offering, Moody's estimates pro forma cash balances at the end of March were around $775 million. Pro forma liquidity sources combined with meaningful cost cutting measures that Moody's expects AMC to undertake should enable the company to absorb negative operating cash flows through Q3 2020. As the virus threat is neutralized, theatres reopen and EBITDA expands with moviegoers gradually returning to the cinema for what is expected to be a relatively strong movie slate next year, Moody's projects leverage will decline to the 9x area in 2021; however, free cash flow will remain negative.

The negative outlook reflects Moody's expectation for lower revenue and EBITDA this year coupled with weakened liquidity as a result of temporary closures of AMC's theatre circuit. It also incorporates the numerous uncertainties related to the social considerations and economic impact from COVID-19 on AMC's cash flows and liquidity, especially if the virus continues to spread and forces AMC to keep many of its theatres closed for a protracted period. The negative outlook embeds Moody's latest view that the reopening for much of AMC's circuit will occur beyond June. As such, Moody's believes AMC will now face negative operating cash flows through Q3 2020. The current debt raise, however, will provide the company with sufficient liquidity to cover its cash burn through Q3 2020 and into Q4 2020, if necessary. The negative outlook also considers the reduced headroom under AMC's springing and financial maintenance covenants due to revolver usage and increased secured debt combined with expected EBITDA shortfalls.

A month ago, AMC shuttered its global circuit of 1,004 theatres [4][5] in response to public gathering restrictions, stay-at-home orders and social distancing practices put in place by national and local governments to combat the spread of the coronavirus. Given that the company has not generated any revenue during this period, Moody's fully expects AMC will continue to aggressively reduce its variable operating expenses, furlough employees (including corporate staff) and stop paying much of its fixed rent costs through negotiated cash deferrals or abatement programs with landlords similar to other cinema operators. While Moody's believes AMC has meaningfully lowered its cost base, liquidity has also tightened given that the company fully borrowed under its two revolvers in late-March to help cover the cash burn.

Moody's previously expected AMC's theatre closures to last up to three months through mid-June. However, as the number of COVID-19 infections and fatalities have continued to spread across several European countries and US states where AMC operates a large number of theatres, Moody's now believes these sites will endure a longer-than-expected period of coronavirus restrictions imposed by their governments. This will force AMC's theatres in these hotspots to remain closed beyond June and into Q3 2020, in Moody's opinion. In Europe, AMC has a sizable presence in Italy, Spain, the UK and Ireland. In the US, AMC maintains large operations in twelve US states: New York, New Jersey, Michigan, Louisiana, California, Washington, Massachusetts, Illinois, Florida, Georgia, Connecticut and Pennsylvania. Based on AMC's 2019 10-K filing [5], these four countries and 12 states represent approximately 50% of AMC's total theatre circuit.

With the ongoing uncertainty regarding the depth and duration of the coronavirus outbreak and specificity over reopening of the economy, Moody's now expects AMC's theatres will reopen on a rolling basis due to each region's timetable for curbing the virus and reviving their economies. Importantly, even after the coronavirus restrictions are lifted, the potential remains for the virus to remain active in the community (including the possibility of a second wave resurfacing later this year) until a vaccine is widely available.

Additionally, with the global economy facing recession this year and the prospect of extended business closures, layoffs and high rates of unemployment, an erosion of consumer confidence will lead to a reduction in discretionary consumption. Given these economic realities, even if some of AMC's theatres were to reopen by June or sometime in Q3 2020, Moody's expects moviegoer demand will be weak. The supply of movies has also been impacted since the major film studios have postponed releases that were scheduled to open through the end of July. As such, the expected timing for reopening AMC's theatres in late summer will negatively impact ticket sales, especially because cinema operators generate the majority of their annual revenue during the important May to early September box office season.

Delayed theatre reopenings and lower moviegoer attendance will result in reduced profitability this year. As such, Moody's will closely monitor AMC's headroom under its US credit facility's springing covenant and UK facility's maintenance covenant, which could decrease rapidly as a result of a substantial decline in EBITDA and falling cash levels combined with increased secured debt in the capital structure. The maximum net senior secured leverage covenant of 6x became applicable under the US revolver when it was fully drawn. At 31 December 2019, the cushion was substantial at roughly 80%, according to AMC's 2019 10-K filling [5]. The UK credit facility requires AMC's Odeon subsidiaries in England and Wales to maintain a 3x leverage ratio [2]. Based on the company's "Supplemental Disclosures on COVID-19 and Other Matters" dated 16 April 2020 [2], AMC expects to obtain waivers from its banks given that the covenant cushions could tighten materially over the coming quarters.

The new notes will boost AMC's cash balances at a time when it is needed to service upcoming debt payments. Based on AMC's 2019 10-K filing [5], principal and interest payments on the company's bank credit facilities and notes are due in April, May and June, which will further diminish cash balances. On 22 April 2020, principal and interest payments are due on the credit facilities ($225 million revolver and $1.99 billion outstanding term loan), which Moody's estimates to be roughly $28 million. On 15 May 2020, semi-annual interest is due on three notes ($595 million 5.875% senior subordinated notes, $475 million 6.125% senior subordinated notes and GBP500 million 6.375% senior subordinated notes), which Moody's estimates to be roughly $53 million in total. On 15 June 2020, approximately $17.3 of semi-annual interest is due on the $600 million 5.750% senior subordinated notes. After these payments are remitted, and factoring in other costs, Moody's estimates pro forma cash balances will fall to around $575 - $600 million at the end of Q3 2020.

Moody's believes the company's debt load is currently unsustainable and AMC will likely need to right size its capital structure to a level that can be supported by current and future operating levels. While the new debt offering will enable AMC to avert a liquidity shortfall in the short-run, today's rating action also reflects the increased likelihood that the company will seek to restructure its balance sheet in the future in a way that leads to losses for some of AMC's financial creditors, barring asset sales or a cash equity injection from its major investors. AMC's primary investors include Dalian Wanda Group Co. Ltd. (Wanda), a China-based private conglomerate, and private equity firm, Silver Lake Capital, L.L.C., according to the company's 2019 10-K filing [5].

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The movie theatre sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in AMC's credit profile, including its exposure to the US and European economies have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and AMC remains vulnerable to the outbreak's continuing spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on AMC of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

STRUCTURAL CONSIDERATIONS

The B3 ratings on AMC's senior secured bank credit facilities and new $500 million first-lien notes reflect their diminished expected recovery prospects due to the numerous uncertainties and challenges facing the company as well as their first-out payment position versus the senior subordinated noteholders. The new first-lien notes will share a first-priority lien on substantially all tangible and intangible assets of the company with the senior secured bank credit facility lenders. The Caa2 ratings on the senior subordinated notes reflect their subordinated position to a sizeable amount of first-lien debt and low anticipated recovery prospects as a result of their very junior position.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating outlook could be revised to stable if AMC reopens its theatres sooner-than-expected, as a result of faster containment of the coronavirus, resulting in minimal impact to liquidity; or if its theatres reopened as planned after a three-month shut down, attendance revives and AMC returns to positive operating cash flow.

A ratings upgrade is unlikely over the near-term, especially if the coronavirus outbreak restricts AMC's ability to reopen its theatres or reduces the company's profitability if overall attendance declines when theatres reopen. Over time, an upgrade could occur if the company experienced positive growth in box office attendance, stable-to-improving market share, higher EBITDA and margins, enhanced liquidity, and exhibited prudent financial policies that translate into an improved credit profile. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA is expected to be sustained below 7x (Moody's adjusted) and free cash flow as a percentage of total debt improves to the 0% range (Moody's adjusted).

The ratings could be downgraded if there was: (i) prolonged closure of AMC's cinemas beyond three months leading to a longer-than-expected cash burn period, an exhaustion of the company's liquidity resources and an inability to access additional sources of liquidity to cover the higher cash outlays; (ii) poor execution on timely implementing the planned cost reductions; and (iii) limited prospects for operating performance recovery in H2 2020 and 2021. A downgrade could also be considered if total debt to EBITDA was sustained above 10x (Moody's adjusted) or free cash flow generation turns meaningfully negative on a sustained basis. Moody's could also downgrade the ratings if there was a high likelihood of a balance sheet restructuring or distressed debt exchange.

SUMMARY OF TODAY'S RATING ACTIONS

Assignments:

..Issuer: AMC Entertainment Holdings, Inc.

$500 Million Senior Secured First-Lien Notes due 2025, Assigned B3 (LGD2)

Ratings Downgraded:

..Issuer: AMC Entertainment Holdings, Inc.

Corporate Family Rating, Downgraded to Caa1 from B3, Placed On Review For Downgrade

Probability of Default Rating, Downgraded to Caa1-PD from B3-PD, Placed On Review For Downgrade

$ 225 Million Revolving Credit Facility due 2024, Downgraded to B3 (LGD2) from Ba3 (LGD2), Placed On Review For Downgrade

$1,985 Million Outstanding Senior Secured Term Loan B1 due 2026, Downgraded to B3 (LGD2) from Ba3 (LGD2), Placed On Review For Downgrade

GBP500 Million (US$ 655.8 Million) 6.375% Senior Subordinated Notes due 2024, Downgraded to Caa2 (LGD5) from Caa1 (LGD5), Placed On Review For Downgrade

$600 Million 5.750% Senior Subordinated Notes due 2025, Downgraded to Caa2 (LGD5) from Caa1 (LGD5), Placed On Review For Downgrade

$595 Million 5.875% Senior Subordinated Notes due 2026, Downgraded to Caa2 (LGD5) from Caa1 (LGD5), Placed On Review For Downgrade

$475 Million 6.125% Senior Subordinated Notes due 2027, Downgraded to Caa2 (LGD5) from Caa1 (LGD5), Placed On Review For Downgrade

Speculative Grade Liquidity Actions:

..Issuer: AMC Entertainment Holdings, Inc.

Speculative Grade Liquidity, Remains SGL-3

Outlook Actions:

..Issuer: AMC Entertainment Holdings, Inc.

Outlook, Changed to Negative from Rating Under Review

The assigned rating is subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's.

Headquartered in Leawood, Kansas, AMC Entertainment Holdings, Inc. is the largest movie exhibitor in the US and globally, operating 1,004 movie theatres with 11,041 screens across the US, Europe and the Middle East. The company is 50% owned by Dalian Wanda Group Co. Ltd. (Wanda). Revenue totaled approximately $5.5 billion for the fiscal year ended 31 December 2019.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] AMC's press release announcing proposed private offering of first lien notes dated 16 April 2020 (https://www.businesswire.com/news/home/20200416006009/en)

[2] AMC's "Supplemental Disclosures on COVID-19 and Other Matters," dated 16 April 2020 (http://investor.amctheatres.com/Cache/IRCache/ca220cfc-2071-2381-a632-311299890f5e.PDF?O=PDF&T=&Y=&D=&FID=ca220cfc-2071-2381-a632-311299890f5e&iid=4171292)

[3] AMC's 8-K filing dated 24 March 2020 (from EDGAR)

[4] "AMC Theaters to Close All U.S. Locations for 6 to 12 Weeks Beginning Tuesday Morning, March 17," dated 17 March 2020 (http://investor.amctheatres.com/file/Index?KeyFile=403312139)

[5] AMC's 2019 10-K filing (from EDGAR)

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.

Gregory A. Fraser, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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