Fitch Rates AMC's New Sub Notes Due 2025 'B/RR5'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B/RR5' rating to AMC Entertainment Inc.'s (AMC) $600 million senior subordinated note issuance due 2025 in a private offering. AMC's Issuer Default Rating (IDR) is currently rated 'B+'. The Rating Outlook in Stable. A full list of rating actions follows at the end of this release.

AMC announced last week its plans to commence a cash tender offer to redeem all of its outstanding $600 million 9.75% senior subordinated notes due 2020. As of June 2, holders of approximately 97% of the outstanding notes due 2020 had validly tendered. Proceeds from the issuance mentioned above will be used, along with cash on hand, to complete the tender offer of its 9.75% senior subordinated notes due 2020. Fitch views the transaction as neutral to the credit, as it is leverage neutral.

On June 1, both AMC and Regal Entertainment Group announced that they had received Civil Investigation Demands (CID) from the Department of Justice (DOJ) and the Office of Attorney General of the State of Ohio in connection with an investigation concerning clearance practices and participation in certain joint ventures. The practice of clearance is based upon film zones, which are exclusive areas whereby a studio grants an exhibitor exclusivity to show a particular film for a period of time. While there have been reports that the DOJ has been looking into the matter, this is the first official CID to the exhibitors.

Fitch believes the potential outcomes will be fairly neutral to slightly negative to AMC's credit, as competitors in certain markets, especially smaller theaters, will gain access to more titles and showings. However, the risk of potential market share shift to smaller operators is offset by Fitch's belief that customers will continue to be drawn by premium seating and concession, which the smaller operators have not been able to invest in to the same extent as AMC. In markets where there is overlap between competing premium seating and concession theaters, there may be a shakeup in terms of market share. However, on a net-net basis, Fitch believes that AMC will be able to successfully defend its overall market share.

KEY RATING DRIVERS

Through improvements in operations and reduction in absolute levels of debt, AMC has driven unadjusted gross leverage from 8.7x in 2011 to Fitch estimated 4.1x as of March 31, 2015.

AMC has demonstrated traction in key strategic initiatives, as can be seen in its improving admission revenue per attendee, concession revenue per attendee, and concession gross profit per attendee. Fitch calculates March 31, 2015 latest 12 months (LTM) EBITDA margins of 15.9% (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 gross profit dollars in this segment.

AMC Entertainment Holdings Inc. (AMCH) instituted a quarterly dividend of $19.5 million ($78 million for the full year), with the first dividend paid in the second quarter of 2014 (2Q'14.) For the LTM period ended March 31, 2015, AMCH paid $78.3 million in dividends. In conjunction with elevated capital expenditures relative to historical periods, the dividend will pressure free cash flow (FCF). Fitch has modeled capital expenditure spending of approximately $255 million and $270 million in 2015 and 2016, respectively. As a result, Fitch expects FCF will range from zero to positive $50 million over the next two years. LTM FCF at March 31, 2015 was negative $42 million.

Fitch believes that AMC has sufficient liquidity to fund capital initiatives, make small theater circuit acquisitions, and cover its term loan amortization. Liquidity is supported by cash balances of $145 million and availability of $137 million on its secured revolver as of March 31, 2015.

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 low growth rate in 2013 box office performance (up 0.8%), 2014's film slate delivered negative growth in box office revenues, down 5.2%, according to Box Office Mojo. Industry-wide attendance declines of 5.6% were offset minimally by a 0.5% increase in average ticket price, and year-over-year comparisons will prove easy in 2015. Similar to past years, the 2015 film slate features many high-profile sequels that have a strong likelihood of box office success, some of which have already proven to be domestic and international successes. The releases of 'Furious 7', 'Avengers: Age of Ultron', 'Terminator: Genisys,' 'Spectre,' 'The Hunger Games: Mockingjay - Part 2,' and 'Star Wars: The Force Awaken' headline a strong film slate. Fitch believes the film slate will support industry-wide box office revenue levels with low- to mid-single-digit increase in attendance and a slightly increased 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 concession high margins may be pressured over the long term, Fitch believes that the exhibitors will benefit from delivering an improved value proposition to its patrons and that 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.

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 $1.4 billion using a 5x multiple and including an estimate for AMC's 15% stake in National CineMedia LLC (NCM) of approximately $101 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 reflects an expected recovery range of 11%-30%.

RATING SENSITIVITIES

Positive Trigger: Fitch heavily weighs the prospective challenges facing AMC 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 strong in order to provide a cushion for weaker box office years.

Negative Trigger: A debt-financed material buyout, acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 5.5x could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove leverage beyond 5.5x would pressure the rating as well.

LIQUIDITY AND DEBT STRUCTURE

AMC's liquidity is supported by $145 million of cash on hand (as of March 31, 2015) and $137 million availability (net of letters of credit) on its revolving credit facility, which is sufficient to cover minimal amortization payments on its term loan.

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;

--Approximately $18.3 million in subordinated notes due 2020;

--$375 million in subordinated notes due 2022

--$600 million in subordinated notes due 2025.

Fitch currently rates AMC as follows:

--IDR to 'B+';

--Senior secured credit facilities to 'BB+/RR1';

--Senior subordinated notes to 'B/RR5'.

The Rating Outlook is Stable.

Date of Relevant Committee: Feb. 26, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage [749393 - 28-MAY-2014] (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Related Research

AMC Entertainment, Inc. [793728 - 13-OCT-2014]

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=793728

An Exclusive Preview -- Fitch's 2014 Movie Exhibitor Outlook and Analysis [734795 - 21-MAY-2014]

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=734795

Credit Encyclo-Media: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector (Volume VII, 2014-2015) [787688 - 02-OCT-2014]

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=787688

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Fitch Ratings
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Source: Fitch Ratings

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