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I AGREE
04 Jan 2011
$150 million add-on notes rated; outlook stable
Toronto, January 04, 2011 -- Moody's Investors Service (Moody's) assigned a B3 rating to Regal Entertainment
Group's (Regal) new $150 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 new
issue will be used to pay down Regal Cinema's $1,235 million
bank credit facility due November 2016, the transaction is neutral
to Regal's consolidated credit profile and Regal's B1 corporate
family rating (CFR), B1 probability of default rating (PDR),
and stable rating outlook were affirmed. Further, the add-on
notes are rated at the same B3 level as the reference note issue.
However, as the transaction decreases the proportion of senior secured
debt while increasing that for junior-most debt, the rating
for Regal Cinema's bank credit facility was upgraded to Ba2 from Ba3.
In December, Regal announced and paid a $216 million special
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 $105 million of convertible notes due March, 2011,
and as Regal continues to have a relatively large cash balance ($149
million at September 30, 2010, pro forma for the redemption
and special dividend), the dividend can be accommodated within the
B1 rating, albeit the company has consumed some of its financial
flexibility. This is especially the case in light of recent trends
that show deteriorating leverage and coverage. However, as
we expect the company to be cash flow positive, do not expect financial
covenant compliance issues and given the cash balance, Regal continues
to have very good liquidity. The SGL-1 speculative grade
liquidity rating therefore also remains unchanged, and the rating
outlook remains stable.
The following summarizes today's rating actions and Regal's
ratings:
Ratings and Outlook Actions:
..Issuer: Regal Entertainment Group
....Senior Unsecured add-on Senior
Notes issue assigned B3 (LGD6, 92%)
....Senior Unsecured Senior Notes (Underlying
issue), unchanged at B3 with the LGD assessment changed to LGD6,
92% from LGD6, 94%
....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,
Upgraded to Ba2 (LGD2, 24%) from Ba3 (LGD3, 32%)
....Senior Unsecured Regular Bond/Debenture,
unchanged at B2 with the LGD assessment changed to LGD5, 72%
from LGD5, 82%
....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 10.75%);
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 approximately
$144 million of cash (September 30, 2010, pro forma
for this March's $105 million convertible note redemption
and last month's $216 million special dividend), 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 ratings 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 not likely. However, the rating could
be upgraded if the company demonstrates a clear trajectory towards maintaining
TD/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%
FCF/TD. Additionally, adverse liquidity developments,
material debt-financed acquisitions or TD/EBITDA leverage approaching
6x would also likely pressure the rating.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The principal methodologies used in this rating were Probability of Default
Ratings and Loss Given Default Assessments published in June 2009,
and Speculative Grade Liquidity Ratings published in September 2002.
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 6,705 screens
in 540 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
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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
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Moody's Canada Inc.
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Suite 1400
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(416) 214-1635
Moody's rates Regal's notes B3; bank debt upgraded to Ba2
No Related Data.
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