Fitch Affirms Regal's IDR at 'B+'; Outlook Stable
KEY RATING DRIVERS
Regal's ratings reflect Fitch's belief that movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
After two years of negative gross box office growth (down 0.8% and 5.2% in 2013 and 2014, respectively), 2015 is off to a good start with relatively flat growth of 0.6% in the first quarter, according to Box Office Mojo. In 2014, Industry-wide attendance declines of 5.6% were offset minimally by a 0.5% increase in average ticket price, and year-over-year comparisons will prove easy in 2015. Further, there are many high-profile sequels that have a strong likelihood of box office success through the remainder of 2015. Following the successes of 'Avengers: Age of Ultron' and 'Furious 7', the 2015 slate is headlined by 'Jurassic World', 'The Fantastic Four', 'The Hunger Games - Mockingjay - Part 2', 'Terminator: Genesis' and 'Star Wars: Episode VII'. Fitch believes the film slate will support industry-wide box office revenue levels with low- to mid-single digit increase in attendance and a slightly increased average ticket price.
Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. While high margin concessions may be pressured, Fitch expects that in the long term, the exhibitors will continue to benefit from delivering an improved value proposition to its patrons, and that premium food services/offerings will grow absolute levels of revenue and EBITDA.
Regal's solid liquidity position is supported by interest coverage that generally remains at or above 3.0x, annual predividend FCF between \$150 million and \$300 million, and a favorable near-term maturity schedule. Fitch's base case projects the company to roughly generate around \$200 million in pre-dividend FCF in 2015 and 2016. Fitch expects cash deployment to be used towards investments into premium seating and concessions, acquisitions and shareholder friendly actions.
The ratings factor the intermediate-/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, collapsing film distribution windows and increasing indirect competition from other distribution channels (such as DVD, VOD, and OTT). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance, and any potential attendance declines will offset some of the growth in average ticket prices and growth in concessions.
In addition, Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
RATING SENSITIVITIES
Positive Trigger: Fitch heavily weighs the prospective challenges facing Regal and its industry peers in arriving at the long-term credit ratings. Significant improvements in the operating environment (sustainable increases in attendance from continued success of operating initiatives) driving FCF/adjusted debt above 2% and adjusted leverage below 4.5x on a sustainable basis could have a positive effect on the rating. In strong box office years, metrics may be stronger in order to provide a cushion for weaker box office years.
Negative Trigger: A debt-financed material acquisition or return of capital to shareholders that would raise the adjusted gross leverage beyond 5.5x could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove leverage beyond 5.5x would pressure the rating as well.
LIQUIDITY AND DEBT STRUCTURE
Regal's solid liquidity position is supported by \$172 million of cash on hand as of March 31, 2015 and \$82.3 million availability under its \$85 million revolver due 2020. FCF before dividend, as of March 31, 2015, latest 12 month (LTM) was \$166 million. Fitch expects pre-dividend FCF around \$200 million annually over the next two years. Fitch estimates approximately \$140 million in annual dividends.
Pro forma the refinancing, Regal has a manageable maturity profile with Regal Cinemas' term loans due in 2022 as its next material maturity:
--Regal Cinemas' \$978 million secured term loans (due 2022; amortizes approximately \$10 million per annum);
--Regal's \$775 million unsecured notes (due 2022);
--Regal's \$250 million unsecured notes (due 2023);
--Regal's \$250 million unsecured notes (due 2025).
Fitch believes that Regal will have sufficient liquidity, including access to credit markets, to address its maturities.
Fitch calculates unadjusted gross leverage of 4.3x (including NCM dividend), and interest coverage at 4.5x as of March 31, 2015.
RECOVERY
Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, thus, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates a distressed enterprise valuation of \$1.9 billion, using a 5x multiple and including an estimate for Regal's 20.2% stake in National CineMedia, LLC of approximately \$135 million.
The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's belief that 91% -100% expected recovery is reasonable. While Fitch does not assign Recovery Ratings for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining \$3.0 billion in operating lease commitments due to their significance to the operations in a going-concern scenario and is liable for 15% of those rejected values (at a net present value).
The structurally subordinated senior unsecured notes at Regal are expected to have average recovery (31% - 50%), reflecting an 'RR4'. Any future issuance of debt by Regal Cinemas would pressure the 'B+/RR4' Regal issue ratings.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the ratings for Regal and Regal Cinemas as follows:
Regal
--IDR at 'B+';
--Senior unsecured notes at 'B+/RR4'.
Regal Cinemas
--IDR at 'B+';
--Senior secured credit facility at 'BB+/RR1'.
The Rating Outlook is Stable.
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