Fitch Affirms Regal's IDRs at 'B+'; Outlook Stable
NEW YORK -- February 5, 2013
Fitch Ratings has affirmed the 'B+' Issuer Default Rating (IDR) of Regal
Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas). The
Outlook is Stable. Please see a full list of ratings at the end of the
The ratings and Stable Outlook reflect the following considerations:
--Fitch believes movie exhibition will continue to be a key promotion window
for the movie studios' biggest/most profitable releases.
--Box office revenue grew solidly in 2012 (+6.5% according to Box Office Mojo)
driven mostly by attendance growth. The 2012 film slate was highlighted by The
Avengers, The Dark Knight Rises, The Hunger Games, Skyfall, The Hobbit, and
the Twilight Saga.
--Fitch recognizes that theater attendance is inherently volatile due to the
quality of the film slate in any given year. The 2013 slate is promising with
many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek
Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World.
However, due to the strong 2012 performance, which will be a challenge to
match, Fitch's current base case for 2013 is for attendance to decline in the
low single digits.
--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. The ratings
factor in the intermediate/long-term risks associated with increased
competition from at-home entertainment media, limited control over revenue
trends, the pressure on film distribution windows, and increasing indirect
competition from other distribution channels (such as VOD and other OTT
services). Regal and its peers rely on the quality, quantity, and timing of
movie product, all factors out of management's control.
--Fitch does not anticipate a significant decline in concession revenue per
patron, but remains cautious that high-margin concessions (which represent 26%
of Regal's total revenues and carry 87% gross margins), may be vulnerable to
reduced per-guest concession spending due to economic cyclical factors or a
re-acceleration of commodity prices. A slight deterioration in concession
margin is factored into the current rating. While Fitch expects increased
concession spend per guest, margins are expected to contract due to the lower
margin premium menu offerings introduced by Regal and other theater circuits.
--Fitch believes that Regal will continue to focus free cash flow (FCF)
deployment toward build-out/expansion of theaters, acquisition of theater
assets, and/or for shareholder-friendly activities.
--Fitch weighs the prospective challenges facing Regal and its industry peers
in arriving at the long-term credit ratings heavily . Significant improvements
in the operating environment (e.g. sustainable increases in attendance) and
sustained deleveraging could have a positive effect on the rating, though
Fitch views this as unlikely.
--Fitch anticipates that Regal, and other movie exhibitors, will continue to
consolidate. While not anticipated, a material debt-funded acquisition or
return of capital to shareholders that would raise the unadjusted gross
leverage beyond 4.5x could have a negative impact on the rating.
--In addition, meaningful, sustained declines in attendance and/or per-guest
concession spending which drove leverage beyond 4.5x could pressure the rating
As of Sept. 27, 2012, liquidity consisted of $253 million in cash and $82
million of availability under Regal Cinemas' $85 million revolving credit
facility due May 2015. There are no significant maturities until 2017 when the
term loan facility comes due.
Fitch-calculated FCF for latest 12 months ended September 2012 was $136
million. Fitch expects 2012 FCF to be negative $50 million. Fitch's FCF
calculation deducts both the $155 million special dividend and Regal's regular
dividend. In 2013, including its regular dividend payment, Fitch expects FCF
to be roughly $50 million to $75 million. The company does not have any
As of Sept. 27, 2012, pro forma for the $250 million Regal issuance in
January, gross debt totaled $2.25 billion and was made up of:
--Regal Cinemas' $990 million secured term loans (due 2017);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's $525 million unsecured notes (due 2018); and
--Regal's $250 million unsecured notes (due 2025).
Fitch calculates Regal's pro forma consolidated lease adjusted gross leverage
at 5.1x and unadjusted gross leverage at 4.6x. While pro forma unadjusted
gross leverage is currently outside of Fitch's longer term parameters, Fitch
forecasts leverage to be below 4.5x at year-end 2012. There is tolerance in
the current rating for leverage to go above 4.5x for a short period of time
due to fluctuations in the box office.
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 $1.7 billion, using a 5x
multiple and including an estimate for Regal's roughly 20% stake in National
CineMedia, LLC of approximately $190 million. Based on this enterprise
valuation, which is before any administrative claims, overall recovery
relative to total current debt outstanding is approximately 75%.
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 $3.2 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). Fitch's recovery analysis shows 84% recovery for Regal
Cinemas' senior unsecured notes (equal in ranking to the rejected operating
leases), which maps to an 'RR2' Recovery Rating. The 'RR6' assigned to Regal's
senior unsecured notes reflects the structural subordination of the notes and
Fitch's expectation for zero recovery.
Fitch has affirmed the following ratings:
--IDR at 'B+';
--Senior unsecured notes at 'B-/RR6'.
--IDR at 'B+';
--Senior secured credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process, or provide additional information,
beyond the issuer's available public disclosure. The ratings above were
unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Rolando Larrondo, +1-212-908-9189
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Shawn Gannon, +1-212-908-0223
Michael Simonton, CFA, +1-312-368-3138
Brian Bertsch, New York, +1 212-908-0549
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