Regal Entertainment Group (RGC) Removed from CreditWatch Negative by S&P

Standard & Poor's Ratings Services said today that it removed all of its ratings on Knoxville, Tenn.-based movie exhibitor Regal Entertainment Group (NYSE: RGC) and its operating subsidiary Regal Cinemas Corp. (collectively, Regal) from CreditWatch, where we had placed them with negative implications on Oct. 28, 2014. The CreditWatch placement had followed the company's announcement that it would explore strategic alternatives, including the potential sale of the company. The outlook is stable.

The affected ratings include the 'B+' corporate credit ratings on both companies, the 'BB' issue-level rating on the senior secured credit facility, and the 'B-' issue-level rating on the senior unsecured notes. The recovery ratings on the debt issues remain unchanged.

"We removed the ratings from CreditWatch because the company announced on Jan. 15, 2015, that it is no longer considering a sale, even though it is still considering 'strategic alternatives to enhance shareholder value'," said Standard & Poor's credit analyst Andy Liu. "The rating action reflects our expectation that a leveraged sale of Regal is unlikely in 2015." We could lower the ratings on Regal if the company announces specific strategic alternatives that cause leverage to increase above 5x or results in us revising and lowering the business risk assessment.

Although Regal is no longer contemplating selling the company, other shareholder favoring actions could still impact the company's credit metrics. Regal is effectively controlled by Phillip Anschutz, who owns about 47% of the common stock and 78% of the voting control. We believe that Mr. Anschutz has not been very active in controlling the company since stepping down from the board in 2006, but Regal has participated in many shareholder rewarding initiatives under his ownership. The $1 per share special dividend ($155 million) paid on Dec. 15, 2014, was the sixth time that the company had paid a special dividend. The dividend was funded with cash, and we had factored it into our analysis. But we would view any future debt-financed special dividend (which we do not assume under our base case scenario), acquisition, or share repurchase negatively, and it could result in a downgrade. We expect Regal to operate with leverage between 4x and 5x over the next few years, and sustained leverage over 5x would likely lead to a downgrade.

The stable rating outlook reflects our expectation that Regal can maintain liquidity of at least $100 million and adjusted leverage below 5x over the next 12-18 months, despite volatility in box office performance and aggressive expansion plans.

We could lower the rating if Regal's operating performance weakens, or if the company's financial policy becomes more aggressive through significant debt-financed acquisitions or shareholder return initiatives. We could also lower the rating if discretionary cash flow turns negative and EBITDA declines in 2015, resulting in sustained leverage above 5x and liquidity falling below $100 million. This would likely entail attendance growth below our expectations for the next two years that causes pro forma revenue to decrease in 2015 and EBITDA margins to contract. This, together with an increase in capital spending, acquisitions or shareholder distributions, or some combination of all these factors, could lead to a downgrade.

We could raise the rating if Regal publicly communicates and adheres to a more conservative financial policy of maintaining leverage in the low-4x area and consistently generates positive discretionary cash flow, despite volatility in box office performance.

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