Fitch Ratings has assigned a ‘B-/RR6’ to AMC Entertainment Holdings Inc.’s (AMC) $475 million dollar denominated senior subordinated private placement notes due 2026. Fitch also maintains a ‘B-/RR6’ rating on the proposed reopening of AMC’s existing 6.375% Sterling denominated senior subordinated private placement notes due 2024. The notes will be general unsecured senior subordinated obligations of AMC Entertainment Holdings, Inc. (AMCH). Both issuances become fungible at the closing of the Nordic Cinema Group Holding AB (Nordic) acquisition and feature a special mandatory redemption in which the notes will be redeemed at par plus accrued interest in the event the acquisition does not close before June 30, 2017. The ‘B+’ Issuer Default Rating (IDR) assigned to AMC remains on Rating Watch Negative.
Proceeds from the issuances, together with proceeds from AMC’s February 2017 $640 million equity offering, are to be used to fund the previously announced acquisition of Nordic. In January 2017, AMC announced it had entered into a definitive agreement to acquired Nordic in a transaction valued at SEK8.6 billion or approximately $954 million. Fitch calculates unadjusted pro forma leverage at 5.1x as of Dec. 31, 2016, adjusting for three acquisitions that closed or are expected to close after Dec. 31, 2016: Carmike Cinemas, Odeon & UCI, and Nordic. Fitch would expect unadjusted leverage to be maintained at or below 4.5x in the 12-18 months following the closing of the acquisition to maintain the ‘B+’ rating.
The Rating Watch Negative reflects expected high leverage upon the Nordic acquisition’s closing, execution risks surrounding 4 integrating three simultaneous acquisitions, and indication of a more aggressive financial policy and merger and acquisition (M&A) strategy.
Upon the resolution of the Nordic acquisition, Fitch would likely downgrade the IDR to ‘B’ reflecting Fitch belief that company’s aggressive financial policy and continued M&A strategy is more in line with a ‘B’ rating. In addition, Fitch will consider AMC’s ability and commitment to reduce leverage following the closing of the Nordic acquisition.
AMC recently announced it intends to use a portion of proceeds from its required National CineMedia (NCM) share sale to fund circuit-wide capital expenditures to support growth initiatives. This represents a reduction to the amount of NCM share sale proceeds Fitch initially expected AMC to use for debt repayment, leading Fitch to expect gross leverage will not decrease below 5.0x until 2019.
KEY RATING DRIVERS
AMC has demonstrated traction in key strategic initiatives: improving admission revenue per attendee as a result of reseating 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 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, AMCH instituted a quarterly dividend of $19.6 million ($78 million for the full year), with the first dividend paid in the second quarter of 2014 (2Q14). For the FYE Dec. 31, 2016, AMCH paid $79.6 million in dividends. Fitch expects capital expenditures to remain elevated, modeling approximately $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 $100 million over the next two years. Fitch calculated FCF for the FYE Dec. 31, 2016 equated to negative $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 $207 million and availability of $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. 5
According to Box Office Mojo, 2016’s box office delivered positive growth of 2.2% and record setting box office revenues of $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. While capital expenditure may 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.
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 reseats and enhanced food and beverage offerings. Fitch expects capex of around $600 million (net of landlord contributions) during 2017;
— Pro forma unadjusted gross leverage under 5.0x by 2019.
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) driving FCF/adjusted debt above 2% and adjusted 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 weaker box office years.
Negative Trigger: Negative rating actions are more likely to coincide with the company’s inability to reduce unadjusted leverage 6 below 4.5x (6.0x on an adjusted basis) in the 12-18 months following the acquisition of Nordic, or the adoption of a more aggressive financial policy, and/or rent-adjusted interest coverage declines below 1.5x-1.75x.
AMC’s liquidity is supported by $207 million of cash on hand (as of December 2016) and $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 assigned the following ratings on Rating Watch Negative:
AMC Entertainment Holdings, Inc.
— Senior subordinated notes at ‘B-/RR6’.