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Fitch Downgrades AMC Entertainment's IDR to 'B'; Outlook Stable
March 31, 2017 / 5:03 PM / 8 months ago

Fitch Downgrades AMC Entertainment's IDR to 'B'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 31 (Fitch) Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) assigned to AMC Entertainment Holdings, Inc. (AMC) to 'B' from 'B+' and removed the IDR and related issue rating from Rating Watch Negative. The Rating Outlook is Stable. Approximately US$4.4 billion of pro forma debt outstanding as of Dec. 31, 2016 is affected by Fitch's rating action. A full list of ratings follows at the end of this release. Fitch's rating actions follows the company's announcement that it has closed on the acquisition of Nordic Cinema Group Holding AB (Nordic). The downgrade reflects Fitch's concern that, now that all previously announced acquisitions have closed, leverage will remain outside the 4.5x threshold beyond 18 months. In addition, the company's more aggressive financial policy and continued merger and acquisition strategy is more in line with a 'B' rating. AMC had initially noted on its Jan. 23, 2017 call discussing the Nordic acquisition that it would be using proceeds from the monetization of their NCM ownership to pay down debt, thereby reducing leverage. However, on their year-end earnings call on February 28, 2017, AMC articulated that a portion of the proceeds would be used for capital expenditures, thereby reducing near-term debt reduction and indicating a more aggressive stature towards leverage. As a result, Fitch does not expect gross leverage to be below 4.5x until 2019. In January 2017, AMC announced it had entered into a definitive agreement to acquire Nordic in a transaction valued at SEK8.6 billion or approximately US$954 million. Proceeds from the March 2017 US$475 million dollar-denominated and 250GBP sterling-denominated senior subordinated private placement notes funded the acquisition. In addition, in February 2017 there was a US$640 million equity offering that was used to pay down a US$350 million bridge loan and fund a portion of the Nordic acquisition. Fitch calculates pro forma unadjusted leveraged at 5.1x as of Dec. 31, 2016. KEY RATING DRIVERS AMC has demonstrated traction in key strategic initiatives: improving admission revenue per attendee as a result of re-seating initiatives, and growth in concession revenue per attendee and concession gross profit per attendee. Fitch calculates EBITDA margins for the fiscal year ended (FYE) Dec. 31, 2016 of 16.8% (excludes distributions from National Cinemedia, Inc. (NCM), an improvement from 13.6% at Sept. 27, 2012. Although Fitch recognizes that AMC's continued expansion into premium food offerings will pressure high concession margins, top-line growth should grow absolute gross profit dollars in this segment. In 2014, AMC instituted a quarterly dividend of US$19.6 million (US$78 million for the full year), with the first dividend paid in the second quarter of 2014 (2Q14). For the FYE Dec. 31, 2016, AMC paid US$79.6 million in dividends. Fitch expects capital expenditures to remain elevated, modeling approximately US$600 million (net of landlord contributions) in 2017, as AMC implements its global capital expenditure strategy which will pressure free cash flow (FCF). However, Fitch does not expect AMC to take further shareholder-friendly actions due to the heightened leverage and capital expenditures. As a result, Fitch expects FCF will range from slightly negative to positive US$100 million over the next two years. Fitch calculated post-dividend FCF for the FYE Dec. 31, 2016 equated to negative US$70 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 US$207 million and availability of US$137.4 million on its secured revolver as of Dec. 31, 2016. 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. According to Box Office Mojo, 2016's box office delivered positive growth of 2.2% and record-setting box office revenues of US$11.4 billion. Industry fundamentals benefited from a strong slate and the expansion of premium amenities, which contributed to attendance growth of 0.1% and a 2.6% increase in average ticket price. The 2016 film slate benefitted from many high-profile tent pole and animated films. Fitch believes 2017 box office is off to a solid start and the film slate will once again feature highly anticipated sequels and tent poles that will support flat- to low-single-digit industrywide box office revenue growth. Fitch believes the investments made by AMC and its peers to improve the patron's experience are prudent. For fiscal 2017, the company expects to spend US$700 million-US$750 million of gross capital expenditures (US$530 million-US$600 million net of landlord contributions), which includes plans to renovate an additional 122 theatres and 1,560 screens in 2017 and 2018. The anticipated increase of capital expenditures is driven primarily by recliner seat renovations and food and beverage expansion at AMC and legacy Carmike assets. AMC also plans to introduce a new proprietary Premium Large Format (PLF) across the domestic circuit. Internationally, AMC intends to reseat Odeon & UCI theatres and roll out enhanced food options and PLF screens across their entire international asset base. While capital expenditure will be elevated over the ratings horizon and high concession margins may be pressured over the long term, exhibitors should benefit from delivering an improved value proposition to their patrons and that the premium food services/offerings will grow absolute levels of revenue and EBITDA. Finally, 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 US$3 billion using a 5x multiple. 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 RRs for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining US$6.2 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. The 'RR6' on the subordinated notes reflects an expected recovery range of 0%-10%. Depending on the cash flow from Nordic and the use of proceeds from the NCM share sale, there is a possibility the company's senior subordinated notes could migrate to an 'RR5.' KEY ASSUMPTIONS Fitch's key assumptions within the rating case for AMC Entertainment include: --Low- to mid-single-digit pro forma revenue growth; low-single-digit admissions revenue growth domestically in 2017 driven by low-single-digit growth in average ticket price; low- to mid-single-digit growth in attendance overseas as a result of a strong film slate; --EBITDA margin expansion as a result of synergies from the aforementioned acquisitions; --Capital expenditures remain elevated in the near term as AMC continues to invest in recliner re-seats and enhanced food and beverage offerings. Fitch expects capex of around US$650 million (net of landlord contributions) during 2017; --A of NCM-share sale proceeds are used to reduce debt in 2017-2019; --Pro forma unadjusted gross leverage under 5.0x by fiscal year-end 2018. RATING SENSITIVITIES Positive Trigger: Fitch heavily weighs the prospective challenges facing AMC and its industry peers when considering the long-term credit rating. Significant improvements in the operating environment (sustainable increases in attendance from continued success of operating initiatives) as well as successful integration of newly acquired assets driving FCF/adjusted debt above 2% and unadjusted leverage below 4.5x on a sustainable basis could stabilize the rating. In strong box office years, metrics should be strong enough to provide a cushion for the 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. LIQUIDITY AMC's liquidity is supported by US$207 million of cash on hand (as of December 2016) and US$137 million availability on its revolving credit facility, which is sufficient to cover minimal amortization payments on its term loan. FULL LIST OF RATING ACTIONS Fitch has downgraded and removed the Rating Watch Negative on the following ratings: AMC Entertainment Holdings, Inc. --Long-Term IDR to 'B' from 'B+'; --Senior secured credit facilities to 'BB/RR1' from 'BB+/RR1'; --Senior subordinated notes to 'CCC+/RR6' from 'B-/RR6'. The Rating Outlook is Stable. Contact: Primary Analyst Rachael Shanker, CFA Associate Director +1-212-908-0649 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Jack Kranefuss Senior Director +1-212-908-0791 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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