Fitch Ratings has revised
Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) at 'B+', the senior secured issue ratings at 'BB+'/'RR1' and the senior unsecured issue ratings at 'B'/'RR5'.
The Outlook change is driven by sequential quarterly operating performance improvements since the pandemic-driven 2Q20 trough. Growth in total attendance, average ticket price and concession revenue per patron allowed Cinemark to more than cover its costs and generate sufficient Fitch-calculated EBITDA in the back half of 2021 to finish the year with a slightly positive EBITDA as expected.
Key Rating Drivers
Coronavirus Pandemic: The pandemic created a significant challenge to Cinemark's operations, which depend on consumer discretionary spending and attendance. Cinemark's theaters were initially closed in
Improving Operating Performance: Increasing consumer sentiment is driving box office momentum with 75% of moviegoers expressing comfort with going to theatres. Cinemark over-indexed the North American industry box office by approximately 700bps in both 3Q21 and 4Q21. Attendance continued its sequential improvement from its 2Q20 trough, with aggregate attendance almost doubling to more than 105 million in 2021 and 4Q21 alone increasing 625% to 48.1 million despite the Omicron variant. Coupled with a 12.5% increase in average ticket price, FY21 admissions revenues grew 119% to
Adequate Liquidity: As of
Dependent on
Cinemark's ratings rely on the assumption that theatrical exhibition will remain a key window for film studios' large film releases (tent poles) once the pandemic abates. Studios have consistently reasserted their belief in theatrical windowing throughout the pandemic as they understand the opportunity it presents for branding and raising consumer awareness for content and IP.
Fitch believes film studios will return to theatrical exhibition at a minimum for its tent pole releases to offset the high production and marketing costs associated with these projects. In addition, the talent involved in creating films are reliant to some extent on box office metrics for current and future income generation.
Increasing Competitive Threats: The increase in competitive threats continues to elevate concerns over secular declines in theatrical attendance. The ratings factor in the intermediate- to long-term risks associated with increased competition from alternative at-home distribution channels including video on demand, DTC offerings and other video streaming services such as Netflix, Disney+, Amazon Prime, Hulu and Apple+.
Theatrical Attendance: Fitch believes theatrical attendance will continue to rebound meaningfully in the near to mid-term. However, increasing substitution threats could have a longer-term effect on theatrical attendance, which could further shorten the theatrical window. Fitch believes the preference for in-home filmed entertainment viewership will continue to cannibalize traditional theatrical attendance over the long term. As such, Fitch does not expect theatrical attendance to return to historical levels over the rating horizon, offsetting some of the expected growth in average ticket prices and concessions.
Scale and Market Position: Cinemark's ratings are supported by its scale, as the third-largest theater exhibitor in the
Derivation Summary
Cinemark's ratings reflect its scale and market position as the third largest theater chain in the
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Attendance continues to increase sequentially, driven by the lifting of pandemic restrictions, increased comfort in out-of-home environments and broader film slates accessing theatrical releases;
Despite growth in 2022 and 2023, driven by a strong slate, attendance declines in 2024 as studios narrow theatrical film slates and funnel more low- to mid-budget movies to DTC offerings; attendance does not return to historical levels over the rating horizon;
Average
Concession revenues return to mid-single-digit growth;
EBITDA margins improve to 19%+ over the rating horizon;
Capex intensity remains in the mod-single digit range in 2022 before increasing to 7.5% of revenue after 2022;
Dividend reinstated in 4Q22 at
It prepays a portion of its term loan over the near term and issues
Total adjusted debt/operating EBITDAR falls below 5.5x in 2022 and remains in low-5x range over rating horizon.
The recovery analysis assumes Cinemark would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim.
Cinemark's going-concern EBITDA is based on FY 2019 pre-pandemic EBITDA of
Prior recessions provide little precedent for a stress case as theatre attendance increased in six of the last eight recessions due to the fact that theatrical exhibition was a relatively cheap form of entertainment. However, the rise of alternative distribution platforms and streaming subscription plans with all you can eat offerings (e.g. Netflix, Hulu, Disney+, HBO Max etc.) could place added pressure on theatrical exhibition in future downturns, particularly in urban areas where the cost of an average theater ticket exceeds
Fitch employs a 5x enterprise value multiple to calculate post-reorganization valuation, roughly in-line with the median TMT emergence enterprise value/EBITDA multiple, and incorporates the following into its analysis: (1) Fitch's belief that theater exhibitors have a limited tangible asset value and that the business model bears the risk of being disrupted over the longer-term by new distribution models (e.g. Netflix typically releases films in theaters and to its streaming subscribers simultaneously, with some limited exceptions for awards contention); (2) Recent trading multiples (EV/EBITDA) in a range of 6x-17x; (3) Transaction multiples in a range of 9x (e.g.
Fitch estimates an adjusted, distressed enterprise valuation of
Fitch assumes a fully drawn revolver in its recovery analysis since credit revolvers are tapped when companies are under distress. For Fitch's recovery analysis, leases are a key consideration. While Fitch does not assign recovery ratings for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining
Cinemark had
The recovery results in a 'BB+'/'RR1' rating on the senior secured notes and secured credit facilities reflecting expectations that 91%-100% recovery is reasonable. The recovery results in a 'B'/'RR5' rating on the secured notes reflecting reduced recovery prospects owing to the weighting toward secured debt in the capital structure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The ratings for Cinemark have limited upside potential due to the inherent nature of the theatrical exhibition business, the resulting hit-driven volatility and the reliance on film studios for the quantity and quality of films in any given period. In strong box office years, metrics may be stronger in order to provide a cushion in weaker box office years;
Total leverage (total debt with equity credit/operating EBITDA) sustained below 2.5x and adjusted leverage (including lease equivalent debt) below 4.5x;
FCF margins sustained in the mid-to high-single digits.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total leverage sustained above 3.5x and adjusted leverage sustained above 5.5x;
Significant deterioration in Cinemark's liquidity position;
Increasing secular pressure as illustrated in sustained declines in attendance and/or concession spending per patron.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Cinemark's liquidity at
Debt Structure: Cinemark had
The senior secured facility is guaranteed by
Issuer Profile
Cinemark is the third largest theater
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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