OREANDA-NEWS. Fitch Ratings has affirmed the 'B+' Issuer Default Rating of AMC Entertainment, Inc. along with the specific issuer ratings assigned to the company's senior secured credit facility at 'BB+/RR1'. Fitch has downgraded the specific issuer ratings assigned to the company's senior subordinated notes to 'B-/RR6' from 'B/RR5.' The downgrade is driven by the increase in incremental secured debt and subordinated debt related to the acquisition of Carmike Cinemas, Inc. The Rating Outlook remains Stable.

Fitch's action follows the company's announcement that it will acquire Carmike Cinemas, Inc. for a total consideration of $1.1 billion consisting of $757 million in cash and the assumption of Carmike's net indebtedness of approximately $350 million. The acquisition is consistent with Fitch's expectations that AMC will continue to focus on deploying capital towards acquisition of theatre assets that are complementary to AMC's portfolio and overall enhancing of the guest experience. Fitch believes Carmike's portfolio provides significant geographical diversification benefits given minimal geographical overlap, which will enhance AMC's presence in small-to-mid-size markets, specifically in the south and southeast regions. In addition, Carmike's screens will benefit from AMC's reseating strategy, which Fitch believes will lead to higher concession revenue and gross profit per attendee.

The acquisition will be financed with cash and incremental debt of $625 million and is expected to close during the fourth quarter of 2016 (4Q16). The transaction price represents an 8.2x multiple of Carmike's fiscal year 2015 (FY15) EBITDA of approximately $135 million. Fitch expects pro forma leverage of approximately 4.8x and pro forma adjusted gross leverage of 6.3x followed by a period of delevering to the company's target net leverage of 3.5x by year-end 2017. While pro forma leverage is outside of Fitch's expectations for the rating, we expect AMC to utilize free cash flow (FCF) to pay down debt and return to a credit profile more reflective of a 'B+' rating by year-end 2017.

KEY RATING DRIVERS
AMC has demonstrated traction in key strategic initiatives, as can be seen in its improving admission revenue per attendee, concession revenue per attendee, and concession gross profit per attendee. Fitch calculates Dec. 31, 2015 latest 12 months (LTM) EBITDA margins of 16.8% (excludes National Cinemedia distribution), an improvement from 13.6% at Sept. 27, 2012. Fitch recognizes that AMC's continued expansion into premium food offerings will pressure high concession margins; however, growth in the top line should grow absolute gross profit dollars in this segment.

AMC Entertainment Holdings Inc. (AMCH) instituted a quarterly dividend of $19.6 million, with the first dividend paid in 2Q14. For the LTM period ended Dec. 31, 2015, AMCH paid $78.5 million in dividends. In conjunction with elevated capital expenditures relative to historical periods, the dividend will pressure FCF. Fitch has modeled capital expenditure spending of approximately $255 million and $275 million in 2016 and 2017, respectively. As a result, Fitch expects FCF will range from zero to positive $50 million over the next two years. LTM FCF at Dec. 31, 2015 was $56 million.

Fitch believes that AMC has sufficient liquidity to fund capital initiatives, make small theater-circuit acquisitions, and cover its term loan amortization. Liquidity is supported by cash balances of $211 million and availability of $75 million on its secured revolver as of Dec. 31, 2015.

AMC'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.

According to Box Office Mojo, 2015's box office delivered positive growth of 7.4% and record-setting box office revenues of $11.1 billion. Industry fundamentals benefited from a strong slate which recorded attendance growth of 4.1% and a 3.2% increase in average ticket price. As 2015 was a record year, it will pose a tough comparison year in 2016. Similar to past years, the 2016 film slate features many high-profile sequels and anticipated new tent poles. The releases of 'Deadpool', 'Batman v Superman,' 'Finding Dory,' and 'Independence Day: Resurgence' headline a strong film slate. 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 AMC and its peers to improve the patron's experience are prudent. While capital expenditure may be elevated in the near term and concession high margins may be pressured over the long term, Fitch believes that exhibitors will benefit from delivering an improved value proposition to their patrons and that the premium food services/offerings will grow absolute levels of revenue and EBITDA.

In addition, AMC and its peers also rely on the quality, quantity, and timing of movie product, all factors out of management's control.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for AMC Entertainment include:
--Low-single-digit admissions revenue growth; low-single-digit growth in average ticket price;
--EBITDA margin expansion;
--Capital expenditures are expected to remain elevated in the near term as AMC continues to invest in recliner re-seats and F&B offerings. Fitch expects capex of $255 million-$270 million during 2016;
--Pro forma unadjusted gross leverage above 4.5x with expected delevering during 2017.

RATING SENSITIVITIES
Positive Trigger: Fitch weighs the prospective challenges facing AMC and its industry peers in arriving at the long-term credit ratings heavily. 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 strong in order to provide a cushion for weaker box office years.

Negative Trigger: Negative rating actions are more likely to coincide with the company's inability to reduce adjusted leverage below 6.0x (4.5x on an unadjusted basis) by the end of 2017 following the acquisition of Carmike Cinemas, and/or rent-adjusted interest coverage declines below 1.5-1.75x. In addition, meaningful, operational deterioration that may include sustained declines in attendance and/or per-guest concession spending or other change in capital allocation that delays the company's planned leverage reduction may also pressure the ratings.

LIQUIDITY
AMC's liquidity is supported by $211 million of cash on hand (as of December 2015) and $75 million availability on its revolving credit facility, which is sufficient to cover minimal amortization payments on its term loan.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

AMC Entertainment, Inc.
--Senior subordinated notes downgraded to 'B-/RR6' from 'B/RR5'.

Fitch has affirmed the following ratings for AMC:
--Long-term IDR at 'B+';
--Senior secured credit facilities at 'BB+/RR1'.

The Rating Outlook is Stable.