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Rating Action:

Moody's downgrades Cinemark's CFR to B2 and rates new sr. secured notes Ba2; outlook negative

13 Apr 2020

Approximately $1.9 billion of existed rated debt impacted and $250 million of new debt rated

New York, April 13, 2020 -- Moody's Investors Service ("Moody's") has downgraded Cinemark USA, Inc.'s ("Cinemark USA") Corporate Family Rating (CFR) to B2 from B1 and the Probability of Default Rating (PDR) to B2-PD from B1-PD. Concurrently, Moody's downgraded Cinemark USA's bank credit facilities to Ba2 from Ba1 (consisting of a $100 million revolving credit facility (RCF) and $646.3 million outstanding senior secured term loan) and $1.16 billion of senior unsecured notes to B3 from B2. Moody's also assigned a Ba2 rating to the proposed $250 million senior secured notes offering as disclosed in the company's 8K filing dated 13 April 2020 [1]. The outlook remains negative. The full list of affected ratings can be found at the end of this press release.

As a wholly-owned subsidiary of Cinemark Holdings, Inc. ("Cinemark" or the "company"), Cinemark USA's ratings derive support from its parent. Net proceeds from the new secured notes will be used to enhance Cinemark's current liquidity and for general corporate purposes. The notes are expected to have a first lien security interest on certain of the company's leasehold interests in real property, according to company's the 8K filing dated 13 April 2020 [1].

RATINGS RATIONALE

The downgrade reflects Cinemark's higher than expected financial leverage in 2020 resulting from today's new secured notes offering. Additionally, based on Moody's projections, the increased interest expense from the incremental debt will likely result in negative free cash flow generation this year compared to modestly positive free cash flow that Moody's previously expected. The rating reflects governance risks, specifically the likelihood that leverage will remain elevated above the mid-3x range over the next two years given the cinema industry's current operational challenges as well as the potential for further debt entering the capital structure to enhance liquidity.

While Cinemark will enhance internal liquidity during this period of uncertainty resulting from the economic effects of the coronavirus pandemic, Moody's projects that pro forma financial leverage in 2020 will now increase to 5.6x total adjusted debt to EBITDA compared to 5.2x previously. This is about two turns higher than company's leverage of 3.4x at 31 December 2019. The sharp increase is also due to Cinemark's recent $98.8 million draw under its revolver, which boosted cash levels but also exhausted its external liquidity sources. According to the company's 8K filing dated 13 April 2020 [1], estimated cash levels at 31 March 2020 were $479.4 million, which includes cash from the revolver draw and cash outlays during Q1 2020 for working capital needs, capital expenditures and the Q4 2019 dividend payment. Incorporating the net proceeds from the notes offering, Moody's estimates pro forma cash balances at the end of March were around $724.4 million. Pro forma liquidity sources combined with meaningful cost cutting measures that Moody's expects Cinemark to undertake should enable the company to absorb negative operating cash flows through the first half of 2020 and potentially into Q3 2020.

The negative outlook reflects Moody's expectation for lower revenue and EBITDA this year coupled with potentially weaker liquidity as a result of temporary closures of Cinemark's theatre circuit in the US (345 theatres) and Latin America (209 theatres) based on the company's 2019 10K filing [2]. On 17 March, Cinemark announced it will close all of its US theatres to adhere to the federal government's recommendation that public gatherings should be restricted to ten or fewer individuals and engage in social distancing and as stay-at-home practices due to the widespread coronavirus pandemic (a.k.a., COVID-19) [3]. Similar mandates have been enacted by national and local governments across Latin America [4][5][6], which have led to theatre closures in Argentina, Brazil, Colombia and other regions where Cinemark operates. Moody's expects the closures to last up to three months, similar to other movie exhibitors, which will result in lower EBITDA. As such, Moody's expects leverage to rise to around 5.6x (Moody's adjusted) and free cash flow to be negative this year. However, 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 4x area and free cash flow generation will revert to positive in 2021.

The negative outlook also reflects the numerous uncertainties related to the social considerations and economic impact from COVID-19 on Cinemark's cash flows and liquidity if the virus continues to spread forcing Cinemark to keep its theatres closed beyond June and government financial aid programs for the theatre industry are delayed. Under this scenario, the ratings could be downgraded if Moody's expects that Cinemark will exhaust its existing liquidity sources, the company is unable to access additional lines of credit and/or the headroom under its springing financial covenant decreases due to revolver usage and increased secured debt combined with higher-than-expected EBITDA shortfalls.

As this global coronavirus crisis unfolds, Cinemark benefits from lack of exposure to Europe, which has experienced extensive infections with several countries under nationwide or partial lockdown. In Latin America (21% of Cinemark's total revenue based on the company's 2019 10K filing [2]), the virus appears to have spread at a slower pace compared to the US and Europe, though cases may eventually escalate there as well. In the US, Cinemark has theatre locations across 42 US states (based on the company's 2019 10K filing [2]). Of the eleven states currently with the highest caseloads (i.e., New York, New Jersey, Michigan, Louisiana, California, Washington, Massachusetts, Illinois, Florida, Pennsylvania and Georgia), the company has a sizable footprint only in California with 66 theatres based on Cinemark's 2019 10K filing [2].

Like most cinema operators, Cinemark has a highly variable cost structure and can quickly reduce operating costs by up to 75% in the short-run. Moody's fully expects the company to implement plans to minimize its cash burn as much as possible during the closure period via a combination of natural expense reductions (i.e., costs not incurred while theatres are closed) and management actions aimed at reductions in maintenance, utilities, payroll and theatre-level operating costs. With respect to the fixed rent costs for its theatres, Moody's expects Cinemark will likely seek to obtain cash relief or rent deferrals during the closure period and beyond, if necessary. In the US, the National Association of Theatre Owners (NATO) supported legislation that was recently enacted to provide emergency financial assistance to the movie theatre industry [7]. While Cinemark's liquidity could benefit from such aid, Moody's has not factored this in our base case projections for 2020.

Even before the coronavirus outbreak forced Cinemark to shut its theatres, the company had planned to reduce operating costs this year by $40 million via operational and process improvements to expand margins. In view of the theatre closures, Moody's expects Cinemark to reduce its net capex this year from the originally planned $300 million and potentially suspend the dividend to help preserve cash and reduce cash outlays. Given the possibility of its theatres remaining closed for up to three months, Moody's expects the lack of revenue generation, combined with the ongoing need to pay certain fixed expenses and debt-servicing costs, will weaken Cinemark's liquidity. Nonetheless, during this three-month period, Moody's expects the company's sizable cash balances to cover the near-term cash burn. To the extent Cinemark is able to reopen its theatres by mid-June and patrons gradually return to its cinemas, the company in conjunction with the major film studios could offer promotions plus early releases and re-releases of certain premium movies to stimulate moviegoer demand, especially during the summer months when Cinemark typically experiences a seasonally strong box office.

The primary risk to Cinemark over the short-run would be a prolonged outbreak, causing its theatres to remain closed for an extended period beyond June coupled with an exhaustion of its existing sources of liquidity and an inability to timely access new liquidity sources to cover the cash burn into Q3 2020. The US emergency economic relief package for cinema operators could improve Cinemark's ability to access additional credit lines from its banks, if this becomes necessary. Further, Cinemark has a sizable portfolio of unencumbered theatre assets that could potentially be monetized to further bolster liquidity. The secondary risk is a potential decline in headroom under the revolver's springing covenant, however this risk will be addressed with a waiver for the September and December quarters based on the company's 8K filing dated 13 April 2020 [1]. Following the company's recent $98.8 million draw down, the net senior secured leverage covenant was triggered and headroom could decrease rapidly when combined with a considerable decline in EBITDA and cash balances. While the company was in compliance with the covenant at 31 December 2019, Cinemark plans to obtain a covenant waiver from its banks for the Q3 2020 and Q4 2020 periods, which will be executed in conjunction with the closing of the new notes, according to the company's 8K filing dated 13 April 2020 [1]. Moody's will closely monitor Cinemark's headroom over the coming quarters. Depending on the timing of Cinemark's theatres reopening, the covenant cushion could remain tight heading into Q1 2021 and Q2 2021. However, Moody's expects the company would proactively seek to obtain covenant relief from its banks for these periods as well..

To the extent Cinemark's theatres reopen by mid-June, Moody's does not expect attendance to be strong in the second half of the year given that 2020 was already expected to be a weak year for big budget tentpole film debuts and movie studios have: (i) postponed releases of several films by pulling them off the spring and summer calendars due to the outbreak and pushing their releases later into 2020 or 2021; (ii) opted to simultaneously debut new films direct-to-consumer on subscription video on demand (SVOD) streaming platforms; or (iii) released movies earlier-than-normal to streaming platforms. Further, Moody's expects some consumers will be hesitant to visit theatres even after the outbreak has subsided while some moviegoers will reduce their out-of-home entertainment activities and instead watch high quality movies at home given the growing number of providers offering premium SVOD content. The stay-at-home safety measures put in place during the COVID-19 outbreak could accelerate this type of consumer behavior and some individuals could spend more time viewing movies at home even after the disease has been contained and theatres reopen. Moviegoer demand will likely remain strong for big budget "cultural event" premium films while in-home viewing will be reserved for low or medium-budget second-tier films. Despite these challenges, Moody's expects cinema operators to remain an integral part of film studios' distribution of their movie content and a key destination for consumers seeking affordable out-of-home entertainment.

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 Cinemark's credit profile, including its exposures to the US and Latin American economies have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Cinemark 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 Cinemark of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.

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

The rating outlook could be revised to stable if Cinemark 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 the three-month shut down, attendance revives and Cinemark returns to positive operating cash flow.

A ratings upgrade is unlikely over the coming 6-12 months, especially if the coronavirus outbreak restricts Cinemark'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 was sustained below 4.5x (Moody's adjusted) and free cash flow as a percentage of total debt improved to above 2% (Moody's adjusted).

The ratings could be downgraded if there was: (i) prolonged closure of Cinemark'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 6.5x (Moody's adjusted) or free cash flow generation turns negative on a sustained basis.

SUMMARY OF TODAY'S RATING ACTIONS

Assignments:

..Issuer: Cinemark USA, Inc.

$250 Million Senior Secured Notes due 2025, Assigned Ba2 (LGD2)

Ratings Downgraded:

..Issuer: Cinemark USA, Inc.

Corporate Family Rating, Downgraded to B2 from B1

Probability of Default Rating, Downgraded to B2-PD from B1-PD

$100 Million Revolving Credit Facility due 2022, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)

$646.3 Million Outstanding Senior Secured Term Loan B due 2025, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)

$400 Million 5.125% Gtd. Senior Global Notes due 2022, Downgraded to B3 (LGD5) from B2 (LGD5)

$225 Million 4.875% Gtd. Global Notes due 2023, Downgraded to B3 (LGD5) from B2 (LGD5)

$530 Million 4.875% Gtd. Global Notes due 2023, Downgraded to B3 (LGD5) from B2 (LGD5)

Speculative Grade Liquidity Actions:

..Issuer: Cinemark USA, Inc.

Speculative Grade Liquidity, Remains SGL-2

Outlook Actions:

..Issuer: Cinemark USA, Inc.

Outlook, Remains Negative

Headquartered in Plano, Texas, Cinemark USA, Inc. is a wholly-owned subsidiary of Cinemark Holdings, Inc., a leading movie exhibitor that operates 554 theaters and 6,132 screens worldwide with 345 theatres and 4,645 screens in the US across 42 states and 209 theatres and 1,487 screens in Latin America across 15 countries. Revenue totaled approximately $3.3 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/research/Business-and-Consumer-Service-Industry--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 outcome 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] Cinemark's 8K filing dated 13 April 2020 (from EDGAR)

[2] Cinemark's 2019 10K filing (from EDGAR)

[3] Cinemark's press release dated 17 March 2020 ( https://ir.cinemark.com/news-events/pressreleases/detail/454/cinemark-to-temporarily-close-u-s-theatres )

[4] Argentina announces mandatory quarantine to curb coronavirus (Reuters, dated 19 March 2020) ( https://www.reuters.com/article/us-health-coronavirus-argentina/argentina-announces-mandatory-quarantine-to-curb-coronavirus-idUSKBN216446 )

[5] Brazil's Sao Paulo to get two-week coronavirus shutdown, Bolsonaro blasts 'hysteria' (Reuters, dated 21 March 2020) ( https://www.reuters.com/article/us-health-coronavirus-brazil/brazils-sao-paulo-to-get-two-week-coronavirus-shutdown-bolsonaro-blasts-hysteria-idUSKBN2180WV )

[6] Colombia extends coronavirus quarantine by two weeks (US News, dated 6 April 2020) ( https://www.usnews.com/news/world/articles/2020-04-06/colombia-coronavirus-quarantine-extended-until-april-27 )

[7] NATO press release dated 25 March 2020 ( https://www.natoonline.org/wpcontent/uploads/2020/03/Theater-Owners-Applaud-Senate-Passage-of-Aid-Package.pdf )

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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