News Column

Fitch Affirms AMC's IDR at 'B'; Outlook Revised to Positive

January 30, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) of AMC Entertainment, Inc. (AMC) at 'B' and revised the Rating Outlook to Positive from Stable. Further, Fitch has upgraded AMC's senior subordinated notes by one notch to 'B-/RR5' from 'CCC+/RR6' on stronger recovery prospects following AMC's tender offer for of its senior unsecured notes, described below. A full list of rating actions follows at the end of this release. The Outlook revision is primarily driven by the company's improved credit metrics (interest coverage, gross leverage, and EBITDA margins) driven by absolute debt reduction (including the proposed tender offer transaction), operating improvements, and Fitch's stable outlook on the movie exhibition industry. Over the next 12 to 24 months, the rating may be upgraded one notch if AMC can demonstrate positive traction with its capital investment plans, via increased revenue per patron and continued growth in EBITDA. Recognizing the hit cyclical nature of the industry and the volatility this can cause to revenues and EBITDA, Fitch would expect unadjusted gross leverage to remain below 4.5x and EBITDA margins of around 15%, in order to support a 'B+' rating. In strong-performing box office years, metrics may be stronger in order to provide a cushion for weaker box office years. On Jan. 15, 2014 , AMC initiated a cash tender offer for any and all of its 8.75% senior notes due June 2019 ( $600 million outstanding). The tender offer expires on Feb. 12, 2014 . Notes that tendered and consented to the proposed amendment on or before Jan. 29, 2014 would receive total consideration of $1,068.75 for every $1,000 tendered. The proposed amendment would eliminate substantially all of the restrictive covenants and certain events of default provisions of the indenture. AMC announced today that it had received tenders and consents from holders of approximately $463.7 million of its outstanding 8.75% senior notes. AMC has the option to call these notes in June 2014 at 104.375%. Fitch expects any notes not tendered would be redeemed in June. The senior note tender offer is subject to certain conditions, including the receipt of net proceeds from an offering of debt securities in an amount sufficient, together with other available cash, to fund accrued interest, fees, and the purchase of tendered notes. The one notch upgrade of the subordinated notes reflects Fitch's expectation that AMC will be successful in completing the tender offer. In the event that AMC does not complete the tender offer by its expiration, the subordinated note ratings may be downgraded by one notch. Through improvements in operations and reduction in absolute levels of debt, AMC has driven unadjusted gross leverage from 8.5x in 2011 to 4.7x as of Sept. 30, 2013 (this does not adjust for the tender offer). On Dec. 23, 2013 , AMC Entertainment Holdings, Inc. (AMCH; parent of AMC) completed an IPO, selling 21.1 million shares priced at $18 per share for net proceeds of $359.1 million after underwriting discounts and commissions. Fitch believes that proceeds will be primarily used to fund its senior note tender offer. Post-IPO, Dalian Wanda Group holds 91% and 78% of voting and economic interest, respectively. AMC has demonstrated traction in key strategic initiatives, as can been seen in its improving EBITDA margin, admission revenue per attendee, and concession revenue per attendee. Fitch calculates Sept. 30, 2013 latest 12 months (LTM) EBITDA margins of 15.2% (excludes National Cinemedia distribution), an improvement from 13.6% at Sept. 27, 2012 . Fitch recognizes that AMC's expected investment into premium food offerings will pressure high concession margins; however, growth in the top line should grow absolute EBITDA dollars. AMCH intends to institute a quarterly dividend of $19 million ( $76 million for the full year), with the first dividend payment expected in the first quarter of 2014. The dividend will more than offset any potential interest savings from debt reduction discussed above, pressuring free cash flow (FCF). Fitch has modeled capital expenditure spending of approximately $250 million in 2014 and 2015. As a result, Fitch expects FCF will range from negative $25 million to positive $25 million over the next two years, and remain positive thereafter. LTM FCF at Sept. 30, 2013 was $73 million . Fitch believes that AMC has sufficient liquidity to fund these capital initiatives, make small theater circuit acquisitions, and cover its term loan amortization. Liquidity is supported by cash balances of $128 million as of Sept. 30, 2013 . KEY RATING DRIVERS 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. Despite a strong 2012 box office performance, 2013's film slate delivered positive growth in box office revenues, up 0.8%, according to Box Office Mojo. Attendance declines of 1.3% were offset by a 2.1% increase in average ticket price. This will pose a tough comparison year in 2014. However, as in the past few years, there are many high-profile sequels that have a strong likelihood of box office success. The releases of 'Captain America: Winter Soldier ,' 'The Amazing Spider-Man 2,' 'X-Men: Days of Future Past,' 'Transformers: Age of Extinction,' 'The Hunger Games: Mockingjay Part 1,' and 'The Hobbit: There and Back Again,' headline a strong film slate. Fitch believes the film slate will support industry-wide box office revenue levels with flat to low single digit declines in attendance and flat average ticket price. Fitch believes the investments made by AMC and its peers to improve the patron's experience is prudent. While capital expenditure may be elevated in the near term and high margin concessions may be pressured, Fitch believes that long term the exhibitors will benefit from delivering an improved value proposition to its patrons and the premium food services/offerings will grow absolute levels of revenue and EBITDA. 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 that any potential attendance declines will offset some of the growth in average ticket prices. In addition, AMC and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control. LEVERAGE AND LIQUIDITY AMC's liquidity is supported by $128 million of cash on hand (as of Sept. 30, 2013 ), $150 million of availability on its revolving credit facility, and the $359.1 million in proceeds from the IPO. Pro forma for the completion of the tender offer, the company has a manageable maturity schedule, which consists of: --Revolver due in 2018; -- $600 million in subordinated notes and $771 million term loan (amortizing at $7.5 million per annum) due 2020. RECOVERY RATINGS AMC's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, hence, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates an adjusted, distressed enterprise valuation of $1.5 billion using a 5x multiple and including an estimate for AMC's 15.4% stake in National CineMedia LLC (NCM) of approximately $150 million . The 'RR1' Recovery Rating for the company's secured bank 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 $2.3 billion (calculated at a net present value) 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. AMC's senior subordinated debt reflects the expected full redemption of AMC's senior unsecured notes. The 'RR5' Recovery rating on the subordinated notes reflect an expected recovery range of 11% - 30%. RATING SENSITIVITIES The senior note tender offer is subject to certain conditions, including the receipt of net proceeds from an offering of debt securities in an amount sufficient, together with other available cash, to fund accrued interest, fees, and the purchase of tendered notes. The one notch upgrade of the subordinated notes reflects Fitch's expectation that AMC will be successful in completing the tender offer. In the event that AMC does not complete the tender offer by its expiration, the subordinated note ratings may be downgraded by one notch. Positive Trigger: Over the next 12 to 24 months, the rating may be upgraded one notch if AMC can demonstrate positive traction with its capital investment plans, via increased revenue per patron and continued growth in EBITDA. Recognizing the hit cyclical nature of the industry and the volatility this can cause to revenues and EBITDA, Fitch would expect unadjusted gross leverage to remain below 4.5x and EBITDA margins of around 15%, in order to support a 'B+' rating. In strong-performing box office years, metrics may be stronger in order to provide a cushion for weaker box office years. Negative Trigger: Secular events that lead Fitch to believe there would be a significant long-term downward trend in the industry would put negative pressure on the rating. In the shorter term, interest coverage below 2.5x could lead to a negative rating action. Fitch has taken the following rating actions for AMC: AMC --IDR affirmed at 'B'; --Senior secured credit facilities affirmed at 'BB/RR1'; --Senior unsecured notes affirmed at 'B/RR4'; --Senior subordinated notes upgraded to 'B-/RR5' from 'CCC+/RR6'. The Rating Outlook has been revised to Positive from Stable. Additional information is available at ' www.fitchratings.com '. Applicable Criteria & Related Research : --'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' ( Aug. 5, 2013 ); --'Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector' ( Sept. 19, 2013 ); --' AMC Entertainment, Inc. ' ( Sept. 26, 2013 ); --'An Exclusive Preview: Fitch's 2013 Movie Exhibitor Outlook and Analysis' ( April 12, 2013 ). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Credit Encyclo-Media VI: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718956 AMC Entertainment, Inc. http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719351 An Exclusive Preview - Fitch's 2013 Movie Exhibitor Oulook and Analysis http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706317 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818472 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst: Rolando Larrondo , +1-212-908-9189 Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst: David Peterson , +1-212-908-0223 Senior Director or Committee Chairperson: Michael Simonton , CFA, +1-312-368-3138 Managing Director or Media Relations: Brian Bertsch , New York , +1 212-908-0549 brian.bertsch@fitchratings.com Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools