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Rating Action:

Moody's downgrades Cineworld's CFR to B3; places ratings under review for further downgrade

24 Mar 2020

London, 24 March 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Cineworld UK Holdco Limited's ("Cineworld" or "the group") Corporate Family rating (CFR) from B1 to B3 and the Probability of Default rating (PDR) from B1-PD to B3-PD. Concurrently, Moody's has also downgraded from B1 to B3, the ratings of the USD3,375 million and the EUR212 million of Senior Secured Term Loan borrowed by Cineworld Finance US, Inc. and the USD462.5 million Senior Secured Revolving Credit Facility borrowed by Cineworld UK Holdco Limited.

The two notch ratings downgrade is triggered by the temporary closures of all of Cineworld's cinema theatres in the US and Europe. Closures have been mandated by the national Governments in the light of the widespread outbreak of Coronavirus across the globe.

"Moody's adjusted gross leverage for Cineworld was already high at around 5.5x at the end of 2019 and we now expect it to rise towards or above 6.5x in 2020. We also expect the company to heavily rely on its revolving credit facility for its cash needs during the year ", says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Cineworld.

The ratings have been placed on review for further downgrade given the uncertainty around the company's ability to (1) reduce its cost base sufficiently in a timely manner, although Moody's recognizes the pro-active measures that the company is taking in this respect; (2) secure a covenant waiver for the June 2020 and potentially also for the December 2020 test; (3) arrange for sufficient additional liquidity buffer for its needs; and (4) potentially secure governmental assistance for its US cinema chain, Regal. The review will also take into consideration the developments related to the acquisition of Cineplex, which will result in a material increase in Cineworld's adjusted leverage, if concluded. However, in Moody's opinion the chances of this acquisition concluding as planned are low.

Moody's plans to conclude the review of the ratings over the coming weeks. The review may result in a further downgrade, particularly if the company fails to address its liquidity concerns in a timely manner.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Cineworld ended 2019 with a Moody's adjusted gross debt/ EBITDA of around 5.5x on a standalone basis. In 2020, Moody's expects the company's leverage (Moody's adjusted) to spike towards or above 6.5x driven by the temporary closure of theatres and Moody's expectation of reduced attendance in 2020 even after the theatres re-open.

Moody's positively recognizes the company's efforts to bring down its costs as much as possible during the closure period. 70% of its overall costs are variable which can be easily curtailed in a closure situation. For the property rental costs, the company is currently in negotiations with the landlords and is hopeful to get a deferral for a significant portion. The company can easily reduce majority of its staff costs, as a large portion is on temporary pay-rolls. Moody's also expects Cineworld to reduce or postpone a portion of its capital expenditure.

Moody' considers Cineworld's liquidity position as extremely weak particularly in the context of the temporary closure of theatres. The company ended 2019 with cash and cash equivalents of USD140.6 million and had drawn USD95 million under its USD462.5 million revolving credit facility (RCF; maturing in February 2023). The RCF has a springing covenant, tested once utilization exceeds 35%. This financial covenant is a maximum total net leverage of 5.5x, stepping down to 5.0x in December 2020. Moody's currently assumes theatre closures of at least 6-12 weeks and believes that the company will need to utilize its RCF meaningfully in the first half of 2020. The company will also need to arrange for additional funding to meet its liquidity requirements.

Given the expectation of a rise in leverage, the company is set to face a covenant breach in June 2020, in the absence of a waiver. Moody's understands that the company is already in negotiations with its banks to seek a waiver. However, it cautiously recognizes that the covenant breach in the RCF can trigger a cross default in the term loan B pursuant to any debt acceleration as a result of such a covenant breach. As part of the review process, Moody's will be assessing the company's ability to secure the covenant waiver in time and also arrange for additional liquidity sources to cover for its cash needs.

Moody's additionally recognizes that the Regal dissenting shareholder legal case may result in an additional cash payment of USD202 million for Cineworld. While the court proceedings are continuing and have faced delays in the past, it remains unclear if the case will conclude in 2020. Moody's already includes this liability in its calculation of the company's leverage.

In December 2019, Cineworld had announced the 100% debt funded acquisition of Cineplex (the largest cinema operator in Canada) for USD2.3 billion (USD34 per share of Cineplex). The share price of Cineplex had fallen to C$10.11 on 19th March 2020. On 16th March 2020, Cineplex announced that as part of the conditions required to be fulfilled to enable the closing of its acquisition by Cineworld, the company needs to meet a debt condition requiring it to have no more than USD725 million outstanding under its credit agreement, subject to certain exclusions. The possibility of prolonged closures could impact the ability of Cineplex to mitigate the related revenue decline and satisfy the debt condition by the 30 June 2020. It is also a condition to closing that there has not occurred a "Company Material Adverse Effect". The definition of Company Material Adverse Effect excludes the impact of certain events and changes, including any change affecting the motion picture theatre industry generally and any outbreaks of illness, provided that such events do not have a materially disproportionate effect on Cineplex relative to other comparable companies operating in the motion picture theatre industry. Given the operational pressures on Cineplex, Moody's is of the opinion that this acquisition is unlikely to conclude.

As part of its review process, Moody's will be closely monitoring the developments around Cineplex's acquisition. Strategically, it will be a negative for Cineworld if it is unable to make this acquisition as the deal would have helped in improving the scale and market position of the company. However, it will be a relief for the company's credit metrics and liquidity requirements at a time of market stress.

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. Cinema operators fall amongst the industry sectors most significantly affected by the shock triggered by the temporary closures of their sites. 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 Cineworld of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

WHAT COULD CHANGE THE RATING UP/DOWN

A near-term downgrade of Cineworld's ratings is possible should the liquidity position of the company worsen further. The ratings could be confirmed at the existing level if the company is (1) able to improve its liquidity position in the near-term; (2) cinema closures are not expected to last more than 6-12 weeks and the company is able to successfully achieve its planned cost savings.

The rating parameters for the B3 rating level are defined below.

Upward pressure may arise if (1) Cineworld's operating profitability improves steadily in 2021, (2) its Moody's adjusted gross leverage remains or improves to below 6.5x on a sustained basis largely driven by EBITDA growth or debt reduction and (2) Cineworld delivers positive and improved free cash flow.

Downward pressure may arise should there be (1) an indication of prolonged closure of cinemas beyond the 6-12 weeks period signalling a bigger drain on the company's liquidity position or failure of the company to execute on the planned cost savings in a timely manner; (2) limited prospects of recovery of the company's operating performance in 2021; and (3) a material deterioration in company's gross debt/ EBITDA such that it remains above 7.5x for a sustained period or the company's free cash flow turns materially negative on a sustained basis.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Cineworld UK Holdco Limited

.... Probability of Default Rating, Downgraded to B3-PD from B1-PD; Placed Under Review for further Downgrade

.... Corporate Family Rating, Downgraded to B3 from B1; Placed Under Review for further Downgrade

....Senior Secured Bank Credit Facility, Downgraded to B3 from B1; Placed Under Review for further Downgrade

..Issuer: 1232743 B.C. Ltd.

....Senior Secured Bank Credit Facility, Downgraded to B3 from B1; Placed Under Review for further Downgrade

..Issuer: Crown Finance US, Inc.

....Senior Secured Bank Credit Facilities, Downgraded to B3 from B1; Placed Under Review for further Downgrade

Outlook Actions:

..Issuer: Cineworld UK Holdco Limited

....Outlook, Changed To Rating Under Review From Stable

..Issuer: 1232743 B.C. Ltd.

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Crown Finance US, Inc.

....Outlook, Changed To Rating Under Review From Stable

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.

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 9,518 screens across 790 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 20% of the quoted equity. During 2019, the company generated revenues of USD4.3 billion and a reported 'adjusted' EBITDA of around USD1.0 billion.

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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