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Rating Action:

Moody's downgrades Cineworld's CFR to Caa3; outlook is negative

01 Oct 2020

London, 01 October 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Crown UK Holdco Limited's ("Cineworld" or "the group") corporate family rating (CFR) to Caa3 from B3 and the probability of default rating (PDR) to Caa3-PD from B3-PD. Concurrently, Moody's has also downgraded to Caa3 from B3, the ratings of the outstanding USD3,328 million and the EUR213 million of senior secured Term Loan B due 2025 borrowed by Crown Finance US, Inc. and the USD573.3 million Senior Secured Revolving Credit Facility due 2023 (RCF at full face value, including the USD 110.8 million undrawn facility maturing in 2020) borrowed by Crown UK Holdco Limited. The outlook on all ratings remains negative.

Moody's decision to downgrade Cineworld's ratings to Caa3 from B3 reflects the significant operating challenges facing the company as the coronavirus outbreak prolongs globally with a high degree of uncertainty around a potential second wave that could have more severe impact on the business performance.

Although 561 of 778 theatres have now re-opened, the company's liquidity profile is tightening again as the USD110.8 million of RCF extension (currently undrawn) sought in May 2020 is approaching expiry in December 2020. If the recovery in box office performance in Q42020 and into 2021 remains challenged, the company could also be in breach of the financial covenants on its RCF (USD433.5 million drawn as of 30 June 2020, covenant triggered as 35% utilized) potentially until the end of 2021 and on the USD250 million of secured loan with private investors, unless it is able to negotiate covenant waivers/ reset with its debt investors in a timely manner. In this regard, Moody's notes that the company is already in advanced negotiations with the banks for covenant waivers for its RCF.

"If the 200 remaining cinemas that are currently closed in the US were not to be open before the end of October 2020, or attendance levels remained significantly low or there are further delays in the Q42020 scheduled significant movie releases to 2021, then Cineworld could easily run short of liquidity" says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Cineworld.

"The company needs to urgently replenish its liquidity by way of seeking an extension of its maturing RCF facility and additional debt or potential equity raise. The current situation is pointing to a unsustainable capital structure and a high risk of default in case the company fails to get the required additional funding." adds Ms. Dixit.

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

RATINGS RATIONALE

Cineworld's entire estate of 780 cinemas in 10 countries was closed from mid-March and re-opened from late June with 217 cinemas still closed because of the Coronavirus pandemic. The company reported very weak H1 2020 results driven by the closure of its theatres globally in Q2 2020. The company's H1 2020 revenues declined by 67% year-on-year while its reported EBITDA (as adjusted by Cineworld) dropped more heavily by 93%. The performance of the newly re-opened theatres has shown some positive early signs helped by the release of the movie Tenet in early September. While the slate for Q42020 currently includes some significant movies such as 'Wonder Woman 1984', "Soul" and the latest James Bond 'No Time To Die', the operating environment remains highly uncertain. If Governments were to strengthen restrictions on social gathering, which may lead to the closure of cinema theatres again or further push back movie releases, it would have a material negative impact on the company's performance.

During the closure period, Cineworld has taken several actions to mitigate the effect of the closures, preserve cash and enhance its liquidity. Such actions include -- (1) negotiations with the landlords for rent relief for over 200 leases by 30th June 2020 and accessing government relief from payment of leases in certain countries (2) deferrals and discussions with key suppliers to reduce costs (3) access to government employment schemes to support employees as well as salary deferrals for some of its senior staff (4) curtailing capital expenditure and suspension of dividends. The company also raised an additional USD 360.8 million of liquidity during Q22020 (of which USD110.8 million was to mature in December 2020) and also secured a covenant waiver for the June 2020 testing date.

Cineworld ended H12020 with cash and cash equivalents of USD285.4 million helped by the USD433.5 million of drawings under its RCF. As per Moody's forecasts and based on the low level of box office recovery since the gradual re-opening of theatres from July, the company has been burning more cash than anticipated. Given the operational challenges and uncertainties, Moody's believes that the company is in need of replenishing its liquidity again to ensure safeguarding its business against the possibility of a second wave of coronavirus driven theatre closures and/ or continued low attendance levels of audiences globally during at least the rest of 2020. In this regard, the company has indicated that its Board is assessing several options with regard to additional sources of liquidity including the extension of the RCF facility which matures at 31 December 2020 and an additional Term Loan and potential equity or semi equity raise. However, Moody's cautiously takes into consideration the risk around the company's failure to arrange such liquidity in the short term.

The RCF leverage covenant is triggered above 35% utilization, and is subject to testing twice a year at 30 June and 31 December. In addition, the RCF extension of USD110.8 million requires a minimum liquidity of USD50 million. The lenders had waived the covenant test at 30 June 2020. At 31 December 2020, the leverage covenant requires Net Debt to Adjusted EBITDA (on the trailing twelve months results) of below 9.0x on a pre-IFRS 16 basis. At 30 June 2021, the leverage covenant requires Net Debt to Adjusted EBITDA of below 5.5x and reduces to 5.0x from 31 December 2021 onwards. The company will be in breach of these covenants should it fail to secure waivers from banks in a timely manner. It is currently in advanced negotiations with its banks for seeking such waivers.

In addition to the above financing arrangements, the company had secured a new USD250.0 million secured loan in June 2020, with a maturity of 2023 with private institutional investors. The secured loan is also subject to covenants, a leverage covenant is tested from December 2021, set at 5.0x Net Debt to EBITDA on the ROW Group. The company has also secured a small loan from the Israeli government for an amount of USD6.9 million with maturity of 2026 with no financial conditions.

Moody's 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. Moody's recognizes that Cineworld aims to make the payment for the case only subject to the receipt of a large one off tax cash receipt under the US CARES act where losses forecast for 2020 can be offset against tax paid in earlier periods.

The company's capital structure has become very likely in Moody's view unsustainable with very high leverage reflecting the potential risk of a distressed debt exchange. In 2020, Moody's expects the company's gross leverage (Moody's adjusted) to deteriorate meaningfully as EBITDA (post IFRS) generation will be minimal at best.

On 12 June 2020, Cineworld announced the termination of the acquisition of Cineplex (Canada's leading cinema chain) as the company become aware of certain breaches of the arrangement agreement by Cineplex. However, uncertainty remains over the ongoing litigation as the two parties blame each other over the failure of the deal and are seeking damages.

The Caa3 ratings on the senior term loans and the RCF are in line with Cineworld's CFR, reflecting the fact that there is a single first-lien class of debt in the structure. The 50% family recovery rate is our standard assumption for covenant-lite loan transactions. Consequently, the Caa3-PD probability of default rating is in line with the CFR.

ESG CONSIDERATIONS

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and asset price volatility 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.

As part of the governance considerations, Moody's is of the view that the company not been proactive enough to arrange for ample liquidity sources to cover the business needs in a timely manner. The rating agency also notes that additional liquidity to date has been arranged in the form of debt rather than equity.

NEGATIVE OUTLOOK

The negative outlook on the ratings reflects the very tight liquidity position of the company, the uncertainty around attendance levels for theatres after service resumption and the risk of any subsequent lockdown measures.

Stabilisation of the outlook would require the company to meaningfully improve its liquidity position by arranging for additional funding in a timely manner.

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

Upward pressure may arise if Cineworld's (1) operating profitability sees signs of sustained improvement in 2021, and (2) Cineworld 's liquidity profile is enhanced and sustained at a more comfortable level.

Downward pressure may arise should there be further tightening of the company's liquidity position and/ or a debt restructuring or bankruptcy filing in the near future.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: 1232743 B.C. Ltd.

....BACKED Senior Secured Bank Credit Facility, Downgraded to Caa3 from B3

..Issuer: Crown Finance US, Inc.

....BACKED Senior Secured Bank Credit Facility, Downgraded to Caa3 from B3

..Issuer: Crown UK Holdco Limited

....Probability of Default Rating, Downgraded to Caa3-PD from B3-PD

....Corporate Family Rating, Downgraded to Caa3 from B3

....BACKED Senior Secured Bank Credit Facility, Downgraded to Caa3 from B3

Outlook Actions:

..Issuer: 1232743 B.C. Ltd.

....Outlook, Remains Negative

..Issuer: Crown Finance US, Inc.

....Outlook, Remains Negative

..Issuer: Crown UK Holdco Limited

....Outlook, Remains Negative

PRINCIPAL METHODOLOGY

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.

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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