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Rating Action:

Moody's rates Regal's add-on notes B3; CFR remains B1

10 Feb 2011

$100 million add-on notes rated; outlook stable

Toronto, February 10, 2011 -- Moody's Investors Service (Moody's) assigned a B3 rating to Regal Entertainment Group's (Regal) new $100 million add-on senior unsecured notes issue (Regal is the publicly traded parent holding company of Regal Cinemas Corporation (Regal Cinemas)). Since proceeds from the modest-sized new issue will be used to partially pay down the $1,088 million balance of Regal Cinema's bank credit facility (due November 2016), the transaction is neutral to Regal's consolidated credit profile and its B1 Corporate Family Rating (CFR) and B1 Probability of Default Rating (PDR) remain unchanged. Further, the add-on notes are rated at the same B3 level as the reference note issue. The rating outlook remains stable. The transaction continues a much needed re-balancing of Regal's consolidated credit profile that more evenly distributes debt capital among senior secured, senior unsecured and senior unsecured holdco instruments, which is a modestly positive development. The rebalancing of relative claims causes minor adjustments to applicable Loss Given Default Assessments, as outlined below.

In December, Regal announced and paid a $216 million special dividend and announced an increase in its regular dividend. In light of what we think are mounting pressures on the industry (theatric windows are shrinking, on-line distribution is gaining momentum, and recent revenue gains have depended mostly on ticket price increases which surely cannot continue indefinitely), we interpreted this as an aggressive step. However, as last Fall's $275 million notes issue prefunded redemption of the remaining $75 million of convertible notes due March, 2011, and as Regal continues to have a relatively large cash balance ($130 million at December 30, 2010, proforma for the pending redemption), the dividend could be accommodated within the B1 rating, albeit the company had consumed some of its financial flexibility, especially in light of recent trends that show debt leverage per unit of capacity (theater, screen) increasing more than related cash flow productivity. However, as we expect the company to be modestly cash flow positive, do not expect financial covenant compliance issues and given the cash balance, Regal continues to have very good liquidity that provides some off-set. In turn, should the relative leverage and cash flow productivity trends continue in opposite directions, the company's liquidity and credit profile may erode somewhat. In the interim, the rating outlook remains stable and Regal's SGL-1 Speculative Grade Liquidity Rating also remains unchanged.

The following summarizes today's rating actions and Moody's ratings for Regal and related entities:

Ratings and Outlook Actions:

..Issuer: Regal Entertainment Group

....Senior Unsecured add-on Senior Notes issue assigned B3 (LGD6, 91%)

....Senior Unsecured Senior Notes (Underlying issue), unchanged at B3 (with the LGD Assessment changed to LGD6, 91% from LGD6, 92%)

....Corporate Family Rating, Unchanged at B1

....Probability of Default Rating, Unchanged at B1

....Speculative Grade Liquidity Rating, Unchanged at SGL-1

....Outlook, Unchanged at Stable

..Issuer: Regal Cinemas Corporation

....Senior Secured Bank Credit Facility, Unchanged at Ba2 (with the LGD Assessment changed to LGD2, 22% from LGD2, 24%)

....Senior Unsecured Regular Bond/Debenture, unchanged at B2 (with the LGD Assessment changed to LGD4, 68% from LGD5, 72%)

....Outlook, Unchanged at Stable

RATING RATIONALE

The company's ongoing nominal free cash flow profile, its relatively high financial leverage and a very limited ability to repay debt from internally generated cash flow are the key considerations that constrain ratings. The company's historic propensity to reward shareholders, which was very recently reinforced, also factors into the ratings assessment. This is especially relevant as business conditions, in our view, deteriorate. While cinema exhibition has an historically proven business model, evolving consumer preferences and distribution technologies suggest that the business is more vulnerable to substitution than has historically been the case, and, in turn, it may be necessary in the near future to maintain a more conservative capital structure than has historically been the case at any given ratings level. Support for the ratings is provided by the company's leading stature in the cinema exhibition industry. Scale and recession-tested financial performance are positive features. So too is the company's remaining approximately 21.5 million unit position in National Cinemedia LLC (approximately 19.4%); the pre-tax realization value of approximately $345 million (assuming a per unit price of $16) provides an important buffer of just under 7% of gross fully adjusted debt. With $130 million of cash balances at December 30, 2010 (pro forma for the pending redemption), modestly positive free cash flow, no near term financial covenant pressure, and sundry assets that could be sold for cash, the company has very good liquidity. This mitigates near term default risk and supports the B1 CFR and PDR.

Rating Outlook

Regal's B1 CFR reflects the trade-offs between the relative stability and the small magnitude of the company's cash flow stream. With no change expected in either parameter, and with very good liquidity, the rating outlook is stable.

What Could Change the Rating - Up

Given the company's ability to generate free cash flow and an historic propensity to allocate free cash flow to equity holders, a near term ratings upgrade is unlikely. However, the rating could be upgraded if the company demonstrates a clear trajectory towards maintaining Total Debt-to-EBITDA below 5x while at the same time maintaining free cash flow-to-debt in excess of 5%.

What Could Change the Rating - Down

Downward pressure on the rating could occur if the company is unable to demonstrate an ability to sustain 2%-to-3% Free Cash Flow-to-Total Debt. Additionally, adverse liquidity developments, material debt-financed acquisitions or Total Debt-to-EBITDA leverage approaching 6x would also likely pressure the rating.

Moody's last rating action for Regal was on January 4, 2011 when the senior unsecured debt was rated B3 and the senior secured bank debt ratings were raised to Ba2.

The ratings were assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and the competitive position of the company versus others in its industry, ii) the capital structure and the financial risk of the company, iii) the projected financial and operating performance of the company over the near-to-intermediate term, and iv) management's track record and tolerance of risk. These attributes were compared against other issuers both within and outside of Regal's core industry and the ratings are believed to be comparable to those of other issuers of similar credit risk. The principal methodology for instrument ratings was Moody's Probability of Default Ratings and Loss Given Default Assessments published in June 2009. The methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Corporate Profile

Regal Entertainment Group (Regal) is the parent company of Regal Entertainment Holdings, Inc., which is the parent company of Regal Cinemas Corporation (RCC) and its subsidiaries. The Company operates a theatre circuit in the United States consisting of 6,698 screens in 539 theatres in 37 states and the District of Columbia. Regal develops, acquires and operates multi-screen theatres primarily in mid-sized metropolitan markets and suburban growth areas of larger metropolitan markets throughout the United States.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Toronto
Bill Wolfe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's rates Regal's add-on notes B3; CFR remains B1
No Related Data.
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