Hollywood Theaters has good profit margins and a competitive position in many of its small markets, but its corporate credit also carries a high financial risk, according to Standard & Poor's. The Portland, Ore.-based company needs additional investments in its theaters, has cash flow concentration risks and operates in a mature and highly competitive industry, S&P adds. The company, which owns 53 theaters in small-to-medium states, is known as Wallace Theater Corp.
S&P has assigned a B rating and a recovery level of 4 to Hollywood's proposed five-year, $125 million first-lien credit facility. This presents an expectation of marginal recovery of 25-50% in a default scenario. The five-and-a-half-year, $35 million second-lien loan has received a CCC+ rating and a recovery rating of 5. This indicates expectations of a negligible recovery of principal of 0-25% in a default scenario, S&P notes. Wachovia Securities is in the market with the bank debt, which refinances the company's existing credit facilities. The bank meeting was held June 24. The first-lien portion is split into a $100 million term loan and a $25 million revolver priced at LIBOR plus 3 3/4%. The second-lien debt pays 7 1/2% over LIBOR. In addition to the term loan proceeds, $10 million of cash and a $4 million equity contribution from sponsor GTCR Golder Rauner will repay the debt. This will leave the movie chain with $135 million in debt and $36.2 million in preferred stock.
Proposed financial covenants on the loan include a maximum first-lien debt leverage of four times and debt leverage of 5.5 times. These terms provide the lenders with negotiating clout before substantial credit impairment could occur, notes S&P.
The outlook for the debt is negative despite recent progress. In 2003, revenue was flattish and EBITDA was down 4.4% because of a decrease in attendance compared with strong levels the prior year. The company's 2004 first quarter results though benefited from the popularity of "The Passion of the Christ" with EBITDA up almost 19%. The theater circuit has also been improved with 38 poorly performing theater closed and a few new theaters opened. A Wachovia banker declined comment and Scott Wallace, ceo of Wallace Theater, did not return calls.