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Rating Action:

Moody's downgrades VUE's CFR to Caa2; outlook is negative

16 Oct 2020

London, 16 October 2020 -- Moody's Investors Service ("Moody's") has today downgraded Vue International Bidco plc's (VUE) corporate family rating (CFR) to Caa2 from B3 and probability of default rating (PDR) to Caa2-PD from B3-PD. Concurrently, Moody's has downgraded to Caa1 from B2 the instrument rating on the EUR634 million senior secured EUR-denominated term loan B1 due 2026 and the GBP65 million senior secured revolving credit facility due 2025, both issued by VUE. The outlook on the ratings is negative.

RATINGS RATIONALE

"The rating action reflects the prospects of a meaningful delay in the recovery in global cinema attendance, resulting among others from the postponement of the release of blockbuster movies, including the latest James Bond 'No Time To Die' delayed to April 2021 from November 2020, while there remains uncertainty on the release of the movie slate due in the first half of 2021", says Gunjan Dixit, Moody's Vice President -- Senior Credit Officer and lead analyst for VUE. The prolonged subdued attendance will result for VUE in a slower-than-expected de-leveraging and will weaken the company's liquidity position which the rating agency forecasts to be sufficient to cover cash burn for the next two quarters from September 2020 assuming no meaningful pick up in attendance during the period. Without a significant recovery thereafter, VUE would need to explore additional funding options.

The meaningful delay in the recovery in global cinema attendance has resulted in a significant proportion of cinemas across Europe temporarily closing or operating on weekend-only hours, including in the UK, VUE's largest market. Crown UK Holdco Limited (Cineworld, Caa3 negative) announced it would temporarily shut its 127 cinema sites across the UK from 8th October 2020 and Odeon (part of AMC Entertainment Holdings, Inc., AMC, Caa3 negative) announced that a quarter of its 120 sites would operate at weekends only. While VUE is still weighing its options in the UK around ways it can leave theatres open, the reduced attendance and lack of strong movie slate in Q4 2020, will cause Vue's leverage and free cash flow to deteriorate meaningfully. VUE closed all of its cinemas, with the exception of Taiwan, in the 3 week period from 23 February to 17 March 2020 due to the global outbreak of coronavirus. VUE started to gradually reopen its cinemas from the end of May 2020 and by 3 September 2020 all sites had reopened.

Moody's now believes that global cinema attendance will remain more pressured in Q4 2020 and also in early 2021 than it had previously forecasted. This is because the list of blockbusters that have had their premieres postponed to at least mid-2021 continues to grow and includes Fast & Furious 9, The Walt Disney Company's (Disney, A2 stable) Black Widow and The Eternals, and Jurassic World: Dominion. Cinema attendance will also remain constrained due to the social distancing measures that will stay in place until a vaccine for preventing coronavirus is found and becomes widely available.

VUE's rated peers - AMC, Cineworld, and Cinemark USA, Inc. (Cinemark, B3 negative) - generate a significant portion of their revenue from the U.S. VUE's presence across European markets partly offsets its exposure to the Hollywood film slate. Indeed, VUE generated 54% of revenues from Europe excluding the UK and Ireland in fiscal year ending 30 November (FY) 2019 where it is currently seeing significant success and high admissions volumes from local titles. The UK, where VUE operates 87 cinemas, is likely to be more challenged.

Moody's now expects that VUE's revenue will drop by more than 50% in FY 2020. The rating agency projects that the group's EBITDA generation and cash flows will remain negative for the next two quarters from September 2020. The cinemas (even if they remain open in the UK) will operate at reduced capacity and potentially face higher costs as government furlough schemes phase out, and cinemas ensure the implementation of enhanced sanitary measures. In this regard, Moody's does take note of the company's continuous efforts to manage and reduce its cost base (particularly its negotiations with landlords across regions for deferrals and discounts for property rentals). Nonetheless, Moody's estimates that VUE's adjusted EBITDA (after IFRS-16 implementation) will be minimal in FY2020. As per Moody's revised forecasts, the company will end up burning more cash than it previously anticipated.

While Moody's expects a gradual recovery in 2021, revenues will likely remain well below 2019 levels in Moody's estimates. The prospects of a slower recovery combined with very high leverage and tough operating conditions as well as the structural challenges facing the cinema industry, could continue to pose meaningful challenges for VUE once the impact of coronavirus is phased off. In Moody's view, the slower-than-expected recovery raises the risk of a debt restructuring as the capital structure becomes unsustainable.

VUE's liquidity will weaken significantly over the next two quarters from September 2020 due to the projected cash burn. At the end of May 2020 (latest data available), VUE had an unrestricted cash balance of GBP101 million excluding drawings of GBP20 million from the GBP50 million cash draw availability under its GBP65 million-equivalent senior secured multicurrency revolving credit facility (RCF) maturing in 2025. On 24th September 2020, VUE announced that it obtained a unanimous waiver on the springing covenant of its RCF as lenders have agreed to waive the net leverage covenant test for the next four testing dates up to and including the end of August 2021 and the company will need to only comply with a minimum liquidity test. VUE does not have any debt maturities until 2025, when the RCF falls due.

Moody's does not currently factor in the CineStar acquisition transaction in its analysis. In March 2020, VUE obtained conditional clearance from the German authorities for the acquisition of CineStar that was announced in October 2018. To satisfy the conditions, VUE is required to sell six cinema sites in Germany. The deadline to sell the sites has now been extended to 13th November 2020. If the transaction goes ahead, it will likely further increase the group's leverage. Although at this stage, Moody's sees the likelihood of this transaction completing as fairly low.

The senior secured facilities and the RCF (both secured mainly on share pledges and guaranteed by subsidiaries accounting for 80% of group consolidated EBITDA) rank pari passu amongst themselves and are rated Caa1, one notch higher than the group's CFR. This is essentially due to the cushion provided by the GBP165 million of PIK second lien facility which ranks behind the senior secured facilities. Moody's has also given full equity credit to the intercompany loan provided by VUE's holding company in light of its deep subordination in the capital structure. The maturity of the intercompany loan, in December 2033, is beyond that of the senior secured credit facilities and second lien facility.

ESG CONSIDERATIONS

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of VUE from the current weak economic activity in Europe and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around Moody's forecasts is unusually high. Cinema operators fall amongst the industry sectors most significantly affected by the shock triggered by the temporary closures of or low attendance at their sites.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on the ratings reflects Moody's expectations that VUE's leverage will spike materially in FY 2020 while the company's liquidity position will deteriorate significantly over the next couple of months raising the risk of a debt restructuring.

Stabilization of the outlook would require the company to proactively arrange additional funding to ensure adequate liquidity buffer for the coming 12 months.

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

Upward pressure is unlikely over the coming 12-18 months. Over time it may arise if (1) VUE's operating profitability improves steadily, (2) its Moody's adjusted gross leverage improves significantly driven by EBITDA growth or debt reduction and (2) VUE improves its liquidity position and returns to at least flat FCF.

Downward pressure may arise should there be (1) a larger-than-expected drain on the company's liquidity position over the coming months; (2) evidence of lower potential recoveries for lenders in any potential debt restructuring.

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.

COMPANY PROFILE

VUE is a leading international cinema operator, managing respected brands in major European markets. For the 12 months ended 30 November 2019, prior to the coronavirus outbreak, the company generated revenue of GBP854 million and reported EBITDA (constant currency, perimeter) of GBP140 million. VUE is owned by OMERS (37.1%), AIMCo (37.1%) and management.

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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