Theatre Operators Get Two Thumbs Up From Moody's

Regal Entertainment Group has earned a two-notch ratings boost by Moody's Investors Service, which upped its ratings on Regal's $145 million revolver and $225 million term loan to Ba2 from B1. The upgrade comes on strong operating performance and the expectation that the financial position will strengthen in 2003.

Regal has successfully completed an initial public offering and is now reaping better margins from the integration of the United Artists and Edward Theatre chains, according to Moody's. Additionally, a strong box office environment boosts the credit. In turn, Regal is expected to generate substantial EBITDA and free cash flow figures are likely to clock in between 10-12% of revenue. Altogether, the company enjoys financial flexibility, a stronger balance sheet, and sufficient liquidity.

The credit has modest leverage of 3.5 times and interest coverage of about 2.2 times. High cash flows should contribute to the reduction of the company's leverage multiples. Still, Moody's is concerned somewhat that Regal's further consolidation strategy will be funded through debt. A slew of general industry afflictions, such as theatre over-capacity, dependence on Hollywood for quality films, box office volatility, and the limited growth coming from a mature industry, still burden the credit.

* Moody's has also upgraded AMC Entertainment's senior unsecured revolver to B2 from B3. Moody's notes, however, that AMC still has potential for loss because of large off-balance sheet lease obligations. Furthermore, due to the unsecured nature of the company's revolver, the bank debt is subordinate in some cases to the lease obligations, and pari passu in others. In respect to the percentage of properties leased by AMC compared to the cash flow generated by those properties, AMC is the most highly leveraged in its peer group, explained Russell Solomon, Moody's analyst, noting that the company owns less and rents more theatres than its industry peers. AMC's lease-adjusted leverage is 5.5 times and interest coverage plus theatre rent is a paltry 1.4 times.

Moody's does consider that AMC has been able to successfully acquire and integrate the General Cinema and Gulf State Theatres assets. It now possesses a strong presence in a number of key markets and with its relatively new theatres and a large number of screens per theatre, AMC is perceived to have high quality assets.