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.
Following a year of record box office sales, 2016 is off to a solid start with growth of 0.4% for the first half of the year, according to Box Office Mojo. During 2015, industrywide attendance grew 4.1% and average ticket prices grew 3.1%, which is likely attributable to higher premium ticket sales. Similar to past years, the 2016 film slate features many high-profile tent poles and anticipated sequels that have a strong likelihood of box office success, some of which have already proven to be domestic and international successes. "Girl on the Train," "Fantastic Beasts and Where to Find Them" and "Rogue One: A Star Wars Story" headline a strong film slate for the remainder of 2016. Fitch believes the film slate will support industry-wide box office revenue levels with flat attendance and a slightly increased average ticket price.
Fitch believes that the 2017 film slate looks solid with films such as "Pirates of the Caribbean: Dead Men Tell No Tales," "Fast and Furious 8," "Thor: Ragnarok" and "Star Wars: Episode VIII." Fitch believes that attendance may grow in the low single digits.
Fitch expects 2016 average ticket prices to be up in the low single digits, driven mostly by a low single-digit increase in base ticket prices, with the average ticket price contribution from premium formats relatively flat to slightly up. After annual growth of roughly 4.5%-5.0% in 2008-2010, ticket price growth has been modest at 2.1%, 0.5% and 3.2% in 2013, 2014 and 2015, respectively. Fitch attributes growth in 2013 and 2015 to a higher number of films released in Premium Large Formats (PLF).
Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. Regal plans to outfit 30% of its total screens with reclining seats by year-end 2017 and continue to expand enhanced food and beverage menus. While high-margin concessions may be pressured, Fitch believes that, in the long term, the exhibitors will benefit from delivering an improved value proposition to its patrons, and premium food services and/or 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 pre-dividend free cash flow (FCF) between $150 million and $300 million, and a favourable near-term maturity schedule. Fitch's base case projects the company to roughly generate around $200 million in pre-dividend FCF in 2016 and 2017. Fitch expects cash deployment to be used towards investments into premium seating and concessions, acquisitions and shareholder friendly actions.
The ratings factor the intermediate - to long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, shrinking film distribution windows and increasing indirect competition from other distribution channels (VOD, OTT, and streaming services). 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.
Fitch's key assumptions within the rating case for Regal include:
--Low-single digit revenue growth in 2016 reflecting strong film slate against tough 2015 comps;
--Flat attendance growth;
--Low-single digit average ticket price growth;
--Mid-single digit increase in Concession revenue per patron as a result of investments in F&B;
--EBITDA margin is forecasted to stay relatively steady around 19% (including NCM distribution);
--Capital expenditures are expected to be $130 million-$145 million net of landlord contributions.
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: Fitch anticipates that the company, as well as other movie exhibitors, will continue to consolidate. While not anticipated, a debt-financed material acquisition or return of capital to shareholders that would raise the adjusted gross leverage beyond 6.0x in the absence of a credible delivering plan could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove adjusted leverage beyond 6.0x would pressure the rating as well.
LIQUIDITY AND DEBT STRUCTURE
Regal's solid liquidity position is supported by $288 million of cash on hand as of June 30, 2016 and $82.3 million availability under its $85 million revolver due 2020. FCF before dividends, as of June 30, 2016, latest 12 month (LTM) was $180 million. Fitch expects pre-dividend FCF around $200 million annually over the next two years. Fitch estimates approximately $140 million in annual dividends.
Regal has a manageable maturity profile with Regal Cinemas' term loans due in 2022 as its next material maturity:
--Regal Cinemas' $958.5 million secured term loans (due 2022; amortizes approximately $9.6 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 3.9x (including NCM dividend), and interest coverage at 4.8x as of June 30, 2016.
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 19.5% stake in National CineMedia, LLC of approximately $100 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 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:
--IDR at 'B+';
--Senior unsecured notes at 'B+/RR4'.
--IDR at 'B+';
--Senior secured credit facility at 'BB+/RR1'.
The Rating Outlook is Stable.