$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
....Probability of Default Rating, Unchanged
....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
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.
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.
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Canada Inc.
Moody's rates Regal's add-on notes B3; CFR remains B1
70 York Street
Toronto, ON M5J 1S9