Rating Action: Moody’s downgrades Cinemark’s CFR to B3 following issuance of new convertible notes; outlook remains negative
Global Credit Research – 19 Aug 2020
Approximately $2.15 billion of rated debt impacted
New York, August 19, 2020 -- Moody's Investors Service ("Moody's") downgraded Cinemark USA, Inc.'s ("Cinemark USA") Corporate Family Rating (CFR) to B3 from B2 and the Probability of Default Rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's downgraded Cinemark USA's bank credit facilities to Ba3 from Ba2 (consisting of a $100 million revolving credit facility (RCF) and $643 million outstanding senior secured term loan), $250 million senior secured notes to Ba3 from Ba2 and $1.16 billion of senior unsecured notes to Caa1 from B3. The Speculative Grade Liquidity rating was downgraded to SGL-3 from SGL-2. The outlook remains negative. Cinemark USA is a wholly-owned subsidiary of Cinemark Holdings, Inc. ("Cinemark" or the "company") and its ratings derive support from the parent. Cinemark recently announced issuance of $400 million senior unsecured convertible notes due 2025 (unrated) at the holding company (the "Holdco notes"). The new Holdco notes will be structurally subordinated to the debt issued at Cinemark USA and contain a 15% over-allotment option that increases the offering size to $460 million if the greenshoe is elected. Net proceeds will be used to fund the convertible note hedge with the remainder allocated for general corporate purposes, which may include repaying outstanding borrowings under the revolving credit facility and enhancing Cinemark's liquidity.
Following is a summary of today’s rating actions:
..Issuer: Cinemark USA, Inc.
Corporate Family Rating, Downgraded to B3 from B2
Probability of Default Rating, Downgraded to B3-PD from B2-PD
$100 Million Revolving Credit Facility due 2022, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
$643 Million Outstanding Senior Secured Term Loan B due 2025, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
$250 Million 8.750% Senior Secured Notes due 2025, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
$400 Million 5.125% Gtd. Senior Global Notes due 2022, Downgraded to Caa1 (LGD5) from B3 (LGD5)
$225 Million 4.875% Gtd. Global Notes due 2023, Downgraded to Caa1 (LGD5) from B3 (LGD5)
$530 Million 4.875% Gtd. Global Notes due 2023, Downgraded to Caa1 (LGD5) from B3 (LGD5)
Speculative Grade Liquidity Actions:
..Issuer: Cinemark USA, Inc.
Speculative Grade Liquidity, Downgraded to SGL-3 from SGL-2
..Issuer: Cinemark USA, Inc.
Outlook, Remains Negative
The downgrade action reflects Cinemark's increased financial leverage in FY 2020 and FY 2021 resulting from the convertible notes issuance as well as the higher interest burden, which will further weaken Cinemark's negative free cash flow (FCF) this year. Governance risk is elevated because Moody's projects leverage will remain at or above the 6x-6.5x range and FCF will remain negative over the next two years given the company's profitability challenges resulting from the novel coronavirus outbreak (COVID-19), economic recession and secular pressures facing the cinema industry as well as the potential for further debt entering the capital structure to enhance liquidity. At 30 June 2020, leverage was 7x (Moody's adjusted), or 7.7x pro forma for the new Holdco notes, and FCF to adjusted debt was roughly -7%. The downgrade also embeds the delayed reopening of the company's theatres following the repeated postponement of several tentpole films and Moody's expectation for weak moviegoer attendance when theatres reopen. Moody's is also concerned that Disney's recent decision to not pursue a wide theatrical release for its long-awaited live-action blockbuster film, Mulan, will siphon revenue from Cinemark and other cinema operators now that Disney plans to release the film on its Disney+ video-on-demand (VOD) streaming platform as a premium offering. Moody's expects these events will result in substantially depressed EBITDA in FY 2020 despite aggressive cost actions taken by the company. The B3 CFR reflects the economic impact on Cinemark's profitability, debt protection measures and liquidity from the forced closure of its global theatre circuit since mid-March as a result of the COVID-19 pandemic. The ratings consider the five months of nearly zero revenue generation arising from the suspension of most of the company's theatre operations and the possibility of further reopening delays and weaker-than-expected moviegoer attendance after its theatres reopen. As of 31 July 2020, 15 of Cinemark's US theatres had reopened to show catalog content and test new safety protocols. Subject to government mandates, the company currently expects to gradually reopen most of its domestic theatres in August. Given that the reopening of Latin American economies appears to be behind the US, Cinemark currently expects its theatres in that region to commence a phased reopening by late-August/early-September. Initially, the company planned to reopen its theatres by June, however this was subsequently postponed to July and then pushed to August because the debut of two blockbuster films, Tenet and Mulan, were repeatedly postponed due to the pandemic. Warner Bros.' Tenet was released on 6 August 2020 in overseas markets and will debut on 3 September 2020 in the US. In July, Disney pulled Mulan from its 21 August 2020 revised release date and recently announced that the film will be released on its Disney+ VOD streaming platform as a premium offering beginning 4 September 2020 in countries where Disney+ is currently available and in theatres in those countries that currently do not have access to Disney+. Disney+ currently has 60.5 million paid subscribers (including Hulu and ESPN, Disney has more than 100 million subscribers) . If Disney's strategy proves successful, Disney could debut its other big films on Disney+, and the other big studios could follow and release many of their tentpole films directly to streaming platforms as well. Notably, Moody's expects OTT video streaming services will reap benefits and siphon revenue from movie exhibitors as film studios increasingly release movies exclusively to online platforms, concurrently with their theatrical release or very soon thereafter as entertainment shifts back home during the pandemic. In late July, AMC Entertainment Holdings, Inc. signed a multi-year agreement with Universal Pictures that gives Universal the option to significantly shorten the theatrical window to only 17 days, or a film's third weekend in theatres, from the typical 60 to 75 days. The theatrical window gives cinema operators exclusivity to show a film in its theatres for a period of time before the studios release the film to on-demand streaming platforms. In exchange, Universal will share a percentage of its streaming rental revenue with AMC. Additionally, with the global economy in recession this year combined with the prospect of extended business closures, layoffs and high rates of unemployment, an erosion of consumer confidence will lead to a reduction in discretionary consumption. Given these economic realities, even when Cinemark's theatres reopen, Moody's expects moviegoer demand will remain challenged as some consumers will avoid public gatherings to avoid the virus. Attendance will also be affected by reduced seating capacity and social distancing guidelines. Further, the supply of movies has also been impacted since the major film studios have postponed numerous releases that were scheduled to open during the summer months and production of films were also halted (though some have recently resumed production as certain regions have reopened). As such, the expected timing for reopening the company's theatres will negatively impact ticket sales, especially because cinema operators generate the majority of their annual revenue during the important May to early September box office season. Cinemark benefits from its position as the third largest movie exhibitor in the US. The company has national scale and geographic diversity buttressed by operations in 42 US states and 15 countries in Latin America. Positive considerations include Cinemark's variable cost structure that facilitated meaningful cost reductions in the short-run, as well as its business line diversity with admissions historically representing approximately 55% of total revenue and higher margin concessions accounting for 35%. The negative outlook reflects Moody's expectation for lower revenue and EBITDA this year and next year (compared to 2019) coupled with weakened liquidity as a result of the temporary closure of Cinemark's theatre circuit and the secular attendance challenges facing the theatre industry. It also incorporates the numerous uncertainties related to the social considerations and economic impact from COVID-19 on Cinemark's cash flows, especially if: (i) the virus continues to spread in certain regions or resurfaces later this year, forcing Cinemark to keep some of its theatres closed for a protracted period; (ii) the company experiences a second suspension of its operations; or (iii) the major film studios continue to postpone release of their movies, increasingly release them to streaming platforms much sooner or avoid theatrical release altogether. The negative outlook embeds Moody's view that Cinemark will experience negative operating cash flows in 2020 and potentially in early 2021 despite the company's efforts to reduce operating costs and plan to reopen most of its theatres in August. Moody's is concerned that Cinemark's liquidity could be exhausted in 2021, which would require the company to seek additional external financing and increase debt further if it is unable to reopen most of its theatres as currently planned and/or moviegoer demand is weaker-than-expected when theatres reopen. Following Cinemark's nearly full draw under its $100 million revolving credit facility (RCF) in March, the 4.25x net senior secured leverage maintenance covenant was triggered. At Q2 2020, the company was in compliance with a 1.9x ratio. In conjunction with the closing of the $250 million senior secured notes issued in April, Cinemark obtained a waiver from its banks for the Q3 2020 and Q4 2020 periods to protect against decreasing covenant headroom due to the expected decline in EBITDA. Given the movie exhibitor's delayed reopening of its theatres and continued operating challenges, the company is seeking to extend the covenant waiver through Q3 2021, in connection with the Holdco notes offering. The waiver would also be effective beginning Q4 2021 through Q2 2022 to the extent the covenant would have been satisfied if the calculation substituted EBITDA from certain 2021 quarters with EBITDA from the respective 2019 quarters to compute LTM EBITDA for Q4 2021 through Q2 2022. An important provision in the proposed waiver agreement restricts Cinemark from upstreaming cash from Cinemark USA to the parent to service the new Holdco notes as along as the RCF borrowings remain outstanding. Over the near term, Moody's expects the cash proceeds from the Holdco notes will be retained at the parent level to help service the semi-annual interest payments. To the extent Cinemark USA's liquidity were to weaken in the future, Moody's expects Cinemark will downstream cash to the operating company to bolster liquidity. The SGL-3 rating reflects adequate liquidity. Moody's projects negative free cash flow generation of approximately -$175 million to -$200 million in FY 2020, as well as negative FCF over the next four quarters. This is chiefly due to meaningful EBITDA shortfalls and negative operating cash flow resulting from theatre closures and weak moviegoer attendance when theatres reopen in the second half of 2020. It also results from Cinemark's increased interest expense burden as a result of its leveraged balance sheet. The company's pro forma cash burn rate is roughly $156 million per quarter ($52 million per month) inclusive of the new Holdco notes. Pro forma cash balances as of 30 June 2020 were roughly $970 million inclusive of the $400 million Holdco notes issuance (or approximately $850 million by the end of August taking into account transaction costs and the monthly cash burn). Cinemark believes its cash position will allow it to sustain operations through 2021 if its theatres remained closed for a protracted period. The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Cinemark of the deterioration in credit quality it has triggered, given its exposure to the US and overseas economies, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating outlook could be revised to stable if Cinemark reopens the majority of its theatres as currently planned, attendance revives to profitable levels and the company returns to positive operating cash flow.
A ratings upgrade is unlikely over the near-term given the expectation for weak operating performance and challenged debt protection measures. Over time, an upgrade could occur if the company experiences positive growth in box office attendance, stable-to-improving market share, higher EBITDA and margins, and enhanced liquidity, and exhibits prudent financial policies that translate into an improved credit profile. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA was sustained below 6x (Moody's adjusted) and free cash flow as a percentage of total debt improved to the 2% area (Moody's adjusted). The ratings could be downgraded if there was: (i) prolonged closure of Cinemark's cinemas leading to a longer-than-expected cash burn period, an exhaustion of the company's liquidity resources or an inability to access additional sources of liquidity to cover higher cash outlays; (ii) poor execution on timely implementing further cost reductions, as necessary; or (iii) limited prospects for operating performance recovery in H2 2020 and 2021. A downgrade could also be considered if total debt to EBITDA was sustained above 7.5x (Moody's adjusted) or free cash flow generation remains negative on a sustained basis.
Headquartered in Plano, Texas, Cinemark USA, Inc. is a wholly-owned subsidiary of Cinemark Holdings, Inc., a leading movie exhibitor that operates 534 theaters and 5,977 screens worldwide with 332 theatres and 4,522 screens in the US across 42 states and 202 theatres and 1,455 screens in Latin America across 15 countries. Revenue totaled approximately $2.2 billion for the twelve months ended 30 June 2020, which reflects closure of the company’s theatres since mid-March 2020.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004. For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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 Walt Disney's press release dated 4 August 2020 titled "The Walt Disney Company Reports Third Quarter and Nine Months Earnings for Fiscal 2020" (https://thewaltdisneycompany.com/the-walt-disney-company-reports-third-quarter-and-nine-months-earnings-for-fiscal-2020/).
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
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Gregory A. Fraser, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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