Approximately $1.0 billion facility rated; outlook remains stable despite headwinds
Toronto, February 14, 2011 -- Moody's Investors Service (Moody's) assigned a Ba2 rating to Regal Cinemas
Corporation's (Regal Cinemas) updated senior secured, approximately
$1.0 billion, term loan facility (Regal Cinemas is
an operating/holding subsidiary of publicly traded Regal Entertainment
Group (Regal). Since the new term loan facility replaces an existing
facility of the same size, 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.
The new facility has two positive features, reduced pricing and
a slightly extended term, but is otherwise unchanged from the existing
facility. The refinance transaction follows last week's add-on
note issue that we viewed as having positive implications, extending
weighted average term to maturity of the company's debt and re-balancing
Regal's consolidated credit profile more evenly amongst senior secured,
senior unsecured and senior unsecured holdco funding sources. These
positive developments follow a credit-negative event in which Regal
paid a $216 million special dividend and announced an increase
in its regular dividend.
The following summarizes today's rating actions and Moody's ratings for
Regal and related entities:
Ratings and Outlook Actions:
..Issuer: Regal Cinemas Corporation
....Senior Secured Bank Credit Facility,
Assigned Ba2 (LGD2, 22%)
....Senior Unsecured Regular Bond/Debenture,
unchanged at B2 (LGD4, 68%)
....Outlook, Unchanged at Stable
..Issuer: Regal Entertainment Group
....Corporate Family Rating, Unchanged
....Probability of Default Rating, Unchanged
....Speculative Grade Liquidity Rating,
Unchanged at SGL-1
....Outlook, Unchanged at Stable
....Senior Unsecured Notes, unchanged
at B3 (LGD6, 91%)
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 approximately 15% of gross unadjusted debt. With $130
million of cash balances at December 30, 2010 (pro forma for the
pending redemption of $75 million convertible notes in March 2011),
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. However, we think the company's
operating environment is gradually becoming more challenging as theatric
windows continue to shrink and on-line distribution gains momentum.
While we do not want to read too much into one or two quarters of poor
performance, the second half of 2010 was disappointing. If
we abstract from attendance declines and look at longer term issues,
we observe debt per unit of capacity (theater and screen -- industry
participants do not disclose per seat figures) growing while equivalent
EBITDAR figures deteriorate. Should these trends continue,
it is unlikely that Regal will be able to maintain its B1 CFR.
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.
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.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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 updated term loan Ba2; CFR remains B1
70 York Street
Toronto, ON M5J 1S9