-- U.S. movie exhibitor Regal has proposed a new issuance of $250 million senior notes due 2025.
-- The company will use net proceeds for general corporate purposes, acquisitions, and/or debt repayment.
-- We are rating the notes 'B-' with a recovery rating of '6' and affirming our 'B+' corporate credit rating on the company.
-- The stable rating outlook reflects our expectation that the company will maintain adequate liquidity and leverage below 7x over the intermediate term. Rating Action On Jan. 14, 2013, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Knoxville, Tenn.-based Regal Entertainment Group. The outlook is stable. At the same time, we assigned the company's proposed $250 million senior notes due 2025 our issue-level rating of 'B-' (two notches lower than the 'B+' corporate credit rating on the company). We also assigned this debt a recovery rating of '6', indicating our expectation for negligible (0% to 10%) recovery for noteholders in the event of payment default. The company plans to use proceeds for general corporate purposes, acquisitions, and/or debt repayment. In addition, we affirmed all other ratings on the company. Standard & Poor's analyzes Regal Entertainment Group and subsidiary Regal Cinemas Corp. on a consolidated basis. Rationale Standard & Poor's Ratings Services' rating on Regal Entertainment Group reflect the company's "aggressive" financial risk profile (based on our criteria), characterized by high leverage amid volatile revenue, EBITDA, and discretionary cash flow. We expect increasing dividends, higher capital spending, and volatile box office trends to keep leverage elevated, at around 6x over the intermediate term. Revenue and EBITDA depend heavily on the performance of the unpredictable U.S. box office. Regal has a "fair" business risk profile, because of its participation in the mature, highly competitive U.S. movie exhibition industry, exposure to the fluctuating popularity of Hollywood films, and the risk of increased competition from the proliferation of entertainment alternatives. Our assessment of management & governance score is "fair." Despite one entity owning a controlling share of the company's voting stock, we are not aware of any material deficiencies in the company's internal controls or risk management. Regal is the largest motion picture exhibitor in the U.S., based on the number of screens. It has a modern theater circuit relative to other major theater chains, increasing its appeal to consumers, and its operations are geographically diversified in the U.S., helping insulate against adverse local or regional conditions. Regal's aggressive cost management and cost advantages related to its large size are the main reasons its profit margin compares well with those of most of its rivals. Its margin increased to 19% for the 12 months ended Sept. 27, 2012, from 18% one year ago because of the strong box-office performance in the first quarter of 2012. However, high fixed costs and substantial variable costs, together with the risks cited above, underpin the fair business profile. Like other exhibitors, Regal is exposed to the risk of increased competition from the proliferation of online entertainment alternatives such as iTunes and Netflix, and higher-quality home viewing. We believe that studios' release of films to premium video-on-demand platforms within the traditional theatrical release window and films becoming available for digital purchase ahead of their DVD availability could hurt Regal's longer-term performance. Under our base-case scenario, for 2013, we expect pro forma revenue to drop at a mid-single-digit percentage rate and EBITDA to decline at a high-single-digit to low-double-digit percentage rate, with declines in attendance more than offsetting higher average ticket prices. We expect attendance to decline at a mid-single-digit percent rate with especially difficult attendance comparisons in the first and fourth quarters. We see flat to minimally higher concession prices, with stable concession volume. We expect the EBITDA margin to gradually contract as EBITDA declines outpace revenue declines. Regal's third-quarter performance was in line with our expectations and industry averages. Revenue and EBITDA declined 7% and 9%, respectively, year over year. The declines were spurred by a 9% drop in attendance, partly offset by a 4% increase in average concession revenue per patron. Average ticket prices remained flat with a decline in premium ticket sales offsetting an increase in base ticket prices. For the 12 months ended Sept. 27, 2012, the EBITDA margin was 19%, up from 18.1% compared with the prior-year period, because of strong first-quarter box-office results. Pro forma for acquisition and refinancing, lease-adjusted EBITDA coverage of interest improved slightly, to 2.1x (assuming the company does not use proceeds to repay debt) from 2x in the prior-year period because of higher EBITDA and lower interest expense. The debt-to-EBITDA ratio, adjusted for operating leases, pro forma for the financing, increased slightly to 6x from 5.9x over the same period with higher debt balances offsetting higher EBITDA. Under our base-case scenario, we expect leverage to remain around 6x in 2013, because we expect attendance to decline, and debt will remain high. Although lease-adjusted leverage is above the 4x-5x debt leverage typical of an aggressive financial risk profile, Regal has substantial sources of liquidity, with 19.8% ownership stake in National CineMedia LLC (trading publicly as National CineMedia Inc.), with a market value of roughly $334 million as of Jan. 10, 2013. Regal converted roughly 17% of EBITDA into discretionary cash flow in the 12 months ended Sept. 27, 2012, down from 31% in the prior-year period, because of unfavorable working capital movements, an increase in capital spending, and a higher dividend payout. We estimate dividend payments will consume about 25% to 30% of projected 2013 EBITDA. Capital spending has been relatively low over the past two years because Regal opened fewer new theaters. However, we expect capital spending to increase from 15% to 20% of EBITDA to about 20% to 25% in 2013, which will negatively impact the company's discretionary cash flow. We expect Regal to convert around 10% to 20% of EBITDA into discretionary cash flow in 2013, depending on box office performance and dividend payouts. Liquidity We believe Regal has "adequate" liquidity (as defined in our liquidity criteria) over the next 12 to 18 months. Our assessment of Regal's liquidity profile incorporates the following expectations and assumptions:
-- We expect sources of liquidity (including cash and facility availability) over the next 12 to 18 months will exceed uses by 1.2x or more. Regal has minimal maturities over the intermediate term.
-- We expect net sources to remain positive even if EBITDA declines more than 20%.
-- Compliance with financial covenants could survive a 15%-20% drop in EBITDA, in our view.
-- Because of Regal's good conversion of EBITDA to discretionary cash flow, we believe it could absorb low-probability, high-impact shocks.
-- Regal has good relationships with its banks, and a satisfactory standing in the credit markets. Liquidity sources include cash balances of around $251.4 million at Sept. 27, 2012, access to an undrawn $85 million revolving credit facility, and about $300 million to $350 million of funds from operations in 2013. We believe a portion of cash balances could be used to fund acquisitions or shareholder distributions. Regal's 19.8% ownership stake in National CineMedia LLC provides additional liquidity. Uses of liquidity include capital spending of roughly $105 million to $120 million in 2013, about $135 million to $145 million in dividends per year, and minimal working capital needs and debt amortization. Under our base-case scenario, we expect Regal to generate about $55 million to $85 million of discretionary cash flow in 2013. At Sept. 27, 2012, Regal had a 38% EBITDA margin of compliance with the adjusted leverage covenant of 6x, its tightest covenant, which we regard as adequate. The covenant does not tighten over the life of the credit agreement. We expect covenant headroom to remain satisfactory over the intermediate term, even with our expectation of EBITDA declines. Near-term debt maturities are minimal, consisting of amortization on the term loan. The undrawn revolving credit facility matures in 2015. Recovery analysis (For the complete recovery analysis, see Standard & Poor's recovery report on Regal, to be published on RatingsDirect as soon as possible following the release of this report.) Outlook The stable rating outlook reflects our expectation that Regal can maintain liquidity of at least $100 million and leverage below 7x over the intermediate term, despite volatility in box office performance. We view the possibility of an upgrade as unlikely. We could lower our rating if operating performance weakens or the company returns to its previously more aggressive financial policy, causing discretionary cash flow to turn negative and EBITDA to deteriorate, resulting in a narrowing of the cushion of compliance with covenants and higher leverage. This would likely entail an attendance decline that causes revenue to fall at a high-single-digit percentage rate, EBITDA to decline around 20%, and EBITDA margin contraction of roughly 200 basis points from the Sept. 27, 2012, level. This, together with an increase in capital spending, would likely cause leverage to approach 7x. Liquidity falling below $100 million could also occur in connection with cash being used to fund acquisitions or shareholder distributions. Although unlikely over the intermediate term, we could raise our rating if Regal adopts and adheres to a financial policy of lower leverage, uses the majority of its excess cash to reduce debt (rather than as shareholder distributions), and consistently generates positive discretionary cash flow, despite volatility in box-office performance. Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Regal Entertainment Group Regal Cinemas Corp. Corporate Credit Rating B+/Stable/-- Regal Entertainment Group Senior Unsecured B-
Recovery Rating 6 Regal Cinemas Corp. Senior Secured BB-
Recovery Rating 2 Senior Unsecured B-
Recovery Rating 6 New Rating Regal Entertainment Group $250M sr unsecd nts due 2025 B-
Recovery Rating 6