Fitch Ratings has revised Cinemark Holdings, Inc's and Cinemark USA, Inc.'s Rating Outlook to Stable from Negative.

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 mid-March 2020, but after a gradual opening rollout, 100% of its domestic and international theaters are open. Although the company is operating with enhanced cleaning and safety protocols, it faces no domestic capacity restrictions and varying international capacity and operating hour restrictions.

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 $780 million. The attendance growth also drove 143% growth in concession revenues to $562 million.

Adequate Liquidity: As of Dec. 31, 2021, Cinemark had $707 million of cash and full availability under a $100 million revolving credit facility maturing in November 2024. Fitch notes Cinemark generated modestly positive EBITDA in 2021, in line with Fitch expectations, and is expected to be FCF positive in 2022.

Dependent on Film Studios' Product: Cinemark and its peers rely on the quality, quantity and timing of movie product, which are beyond management's control. Throughout the pandemic, film studios delayed theatrical releases while also redirecting certain titles to their own DTC offerings, with options ranging from day-and-date simultaneous releases on DTC platforms and in theaters to recalibrated theatrical release windows. Fitch notes film studio changes begun during the pandemic appear to have permanently shortened the theatrical release window.

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 U.S., operating 4,408 screens in 321 theaters across 42 states and 104 DMAs. The company also has a dominant position in Latin America, where it operates 1,460 screens in 201 theaters across 15 countries. Cinemark is the leading theater exhibitor in Brazil and Argentina, and has a significant market presence in Chile, Colombia and Peru.

Derivation Summary

Cinemark's ratings reflect its scale and market position as the third largest theater chain in the U.S., the largest theater chain in Brazil and Argentina, and has a significant market presence in Colombia, Chile and Peru. Cinemark maintains a more conservative balance sheet and greater liquidity than its peers, AMC Entertainment and Cineworld plc, which provides it with a better ability to manage the business through this period of operating uncertainty.

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 U.S. ticket prices return to more normalized low-single-digit growth while international prices continue to decline;

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 $42 million quarterly and grows 5% annually thereafter;

It prepays a portion of its term loan over the near term and issues $750 million of new debt to refinance a portion of its 2025 maturities, with the balance funded with cash on hand;

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 $656 million. Fitch then stresses EBITDA by assuming theaters close due to operational weakness driven by accelerated declines in theatrical attendance as a result of continued media fragmentation and changing consumer preferences. This results in a going-concern EBITDA of $263 million, or a roughly 60% stress.

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 $15. Fitch believes the theater subscription plans like AMC's Stubs List and Cinemark's Movie Club could help support attendance levels.

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. Cineworld Group plc acquired U.S. theater circuit Regal Entertainment for $5.8 billion in February 2018 for an LTM EBITDA purchase price multiple of roughly 9.0x. AMC purchased U.S. theater circuit Carmike for $1.1 billion in December 2016 for a purchase price multiple of 9.2x and AMC purchased international circuit Odeon and UCI for $1.2 billion in November 2016 at a purchase price multiple of 9.1x).

Fitch estimates an adjusted, distressed enterprise valuation of $1.3 billion.

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 $1.3 billion in operating lease commitments (calculated at a net present value) due to their significance to the operations in a going-concern scenario and is liable for 15% of those rejected values. This incorporates the importance of the leased space to the core business prospects as a going concern. Fitch excludes Cinemark Holdings, Inc's $450 million convertible notes as they rank junior to Cinemark's existing debt, are structurally subordinated and have no security or liquidity requirements.

Cinemark had $2.5 billion in total debt as of Dec. 31, 2021.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Cinemark's liquidity at Dec. 31, 2021 was supported by $707 million in cash on hand and full availability under its $100 million revolving credit facility which matures in 2024. The company has begun to generate FCF as expected.

Debt Structure: Cinemark had $2.5 billion in total debt as of Dec. 31, 2021. There are no maturities until 2025, when Cinemark's term loan ($633 million outstanding at Dec. 31, 2021) matures along with the $460 million of 4.5% converts and $250 million of 8.75% super secured bonds, and 2026 when $405 million of 5.875% unsecured notes mature.

The senior secured facility is guaranteed by Cinemark Holdings, Inc. (downstream) and certain of Cinemark USA, Inc.'s domestic subsidiaries (upstream). The credit facility is secured by mortgages on certain fee and leasehold properties and security interests in substantially all of Cinemark USA and guarantor's personal property including a pledge on capital stock of certain Cinemark USA's domestic subsidiaries and 65% of the voting stock of certain foreign subsidiaries.

Issuer Profile

Cinemark is the third largest theater U.S. exhibitor, operating 325 theaters across 42 states and operates 198 theaters across 15 countries in Latin America; is the leading theater exhibitor in Brazil and Argentina, and second in Chile, Colombia and Peru.

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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