Fitch Ratings has assigned Cineplex, Inc. a first-time Long-Term Issuer Default Rating (IDR) of 'B' and Stable Rating Outlook.

Fitch has also assigned 'BB'/'RR1' ratings to Cineplex's CAD$100 million senior secured revolving credit facility and CAD$550 million senior secured notes.

Cineplex's Long-Term IDR reflects the company's 75% share of the Canadian box office market, diversified revenue profile, effective monetization of its entertainment ecosystem and a solid attendance recovery trend since 2Q23. The rating is constrained by Cineplex's smaller scale, lower historical adjusted EBITDA margins and free cash flow generation relative to U.S. peers. Although its leverage is currently high, the company has a potential deleveraging path.

Key Rating Drivers

Leading Market Share and Film Distribution: With a 75% share of the Canadian box office market, Cineplex has a solid market position that enables operating efficiencies and cost advantages at its theaters and location-based entertainment venues. This translates into theater-level cost-savings, maximization of revenue per patron, multiple movie format experiences for all budgets, granularity of market demographics and distribution leverage with film studios. Cineplex's diversified business mix goes beyond the traditional movie exhibition model by clustering non-movie entertainment options and media services, marking a difference versus other pure-players in the region, such as Landmark Cinema or Guzzo Cinemas.

Video-Streaming Platform Competition: Since the pandemic, the theatrical film industry has experienced increasing competition from at-home distribution channels including direct-to-consumer (DTC) streaming services owned by film studios such as Disney+ or HBO Max. As part of their initial strategy to grow subscribers, these studios funneled certain films to their platforms, often bypassing the exclusive theatrical exhibition. However, the studios have recently stated their intent to return to a normalized theatrical release schedule after recognizing that releasing films directly to streaming platforms has not proven as profitable as expected, recognizing the economic relevance of the exclusive theatrical window.

Highly Dependent on Film Studio Production: Movie theater exhibitors rely on the quality, quantity and timing of film production, which are beyond management's control. Throughout the pandemic, film studios delayed theatrical releases while redirecting certain titles to their own DTC offerings, with options ranging from day-and-date simultaneous releases on DTC platforms and theaters to theatrical releases only. Studios have since returned almost exclusively to theatrical releases of new films, although with a shortened theatrical window allowing for earlier transition to DTC platforms.

Fitch believes that theatrical exhibition will remain a key attribute for film studios' large film releases (tent poles) going forward. Studios have said that theatrical exhibition allows for franchise branding, revenue opportunities and ultimately film longevity, helping to offset the high production and marketing costs of these projects.

Diversified Entertainment Ecosystem: Cineplex's business strategy focuses on providing customers with many entertainment options while optimizing and diversifying its revenue mix and operational risks. Cineplex's diversification strategy evolved from geographical expansion, enhanced VIP movie theater experiences, expanded food offerings, and liquor service at selected cinemas. Cineplex offers non-movie entertainment options at its location-based entertainment (LBE) venues including The Rec Room (a social entertainment destination targeting millennials) and Playdium (targeting families and teens in mid-sized communities across Canada), and movie theater and online advertising through its media segment.

Through its alternative programming, Cineplex offers international and non-theatrical content (e.g. Bollywood, sporting events and concerts) that rarely finds a home in the traditional national-chain multiplex. This reduces its dependence on Hollywood studios, while serving a more diverse audience, International Product as a percentage of total box office revenue increased to 10.0% in 2023 from 1.9% in 2013. The most recent diversification initiative focuses on digital commerce including its mobile app and Cineplex Online Store with a catalog of over 11,000 titles in digital formats available for at-home or on-demand distribution.

In 2023, Cineplex generated 43% of total revenue from Box Office (versus 59% in 2012), 35% from Food Service, 9% from Media and 13% from Amusement and Other.

Disrupted Film Production Cycle and Attendance Recovery: As a result of the pandemic and subsequent supply chain challenges, the film industry experienced a significant extension in the typical film creation cycle timeline (averaging about 31 months). Since the re-opening , theatrical films released in North America have increased from 401 movies released ($1.9 billion in box office) in FY20 to 580 movies in 2023 ($8.9 billion in box office). While box office performance is meeting Fitch's expectations for FY23, recovery levels are still below pre-pandemic levels. In 2023, the writers and actors' unions went on strike for over 110 days, contributing to the biggest interruption of content production in the American film and television industry.

Fitch expects FY24 and FY25 to be crucial years for the industry with studios streamlining content-creation cycles and returning to a more normalized theatrical release schedule.

Deleveraging Capacity: EBITDA leverage has significantly improved to approximately 4.7x (pro forma as of December 2023) from 8.7x in FY22. Similarly, EBITDAR leverage has improved to approximately 6.7x from 8.2x, driven by a higher top-line generation and a more effective post-pandemic cost-structure. Fitch expects Cineplex to continue building deleveraging capacity via EBITDA improvements and opportunistic debt repayment, in line with Cineplex's public target of a defined leverage ratio within 2.5x to 3.0x.

Derivation Summary

Cineplex's ratings reflect its scale and market position as one of the largest entertainment companies in Canada. It combines theatrical film experiences with social entertainment destinations and advertising. Cineplex has a relatively smaller scale than its U.S. peers but more diversified and higher operating efficiencies. Cineplex has also lower historical run-rate EBITDA margins and FCF than Cinemark.

Key Assumptions

For FY24, Fitch assumes a low-to-mid single digit decline in attendance as result of about $1.6 billion in film content being delayed and rescheduled to FY25. For FY25, Fitch assumes a full recovery, accounting for the delayed product from FY24, with the last two years growing at a low-to-single digit rate.

Fitch estimates box-office per patron at a low-single digit decrease in FY24, following the announced delays and rescheduling of film content. From FY25 and on, a low-to-mid single digit growth, assuming stable market conditions.

Concession per patron gradually increasing to 4.5% by the end of the projection, reflecting support from increased premium food offerings and expanded liquor license across locations.

The food delivery service is assumed to grow at low-single digit, assuming a modest but consistent demand from moviegoers at home.

LBE food service is assumed to grow at a mid-to-high single digit rate, supported by additional locations across Canada.

Adjusted EBITDA margin for the Film Entertainment and Content Segment decreasing in FY24 by about 13% y/y to 10.7% but then gradually increasing to 12.9% margin by the end of the projection.

For the Media segment, a mid-to-high revenue growth digit was assumed throughout the projection, in terms of EBITDA margin fluctuating from 52.7% to 55.0% by the end of the projected period.

For the Amusement segment, we assumed the announced new LBE locations starting operations in FY24, growing revenue at a low-to-mid single digit rate, while EBITDA margins were maintained at current levels around low-to-mid-twenties.

Corporate overhead of 4.5% of revenues for FY24, gradually increasing to 5.0% in FY25 until the end of the projection.

Effective tax rate at 25% throughout the projected period.

Capex intensity at 5.50% in FY24 to reflect the investment in the new LBE locations to open in FY24. From FY25 and on, a 4.5% per annum.

$155 million of gross proceeds from the P1AG divestiture in FY24, and the refinancing of the existing capital structure of the company with the new revolving credit facility and senior secured notes, also reflecting a $100 million prepayment to the unsecured convertible notes, as part of the comprehensive refinancing plan.

Recovery Analysis

The recovery analysis assumes Cineplex 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.

Adjusted EBITDA: Cineplex's going-concern EBITDA is based on a run-rate consolidated Adjusted EBITDA of $210 million, reflecting pre-pandemic operational levels, in line with the current recovery path and industry expectations in the upcoming years. Fitch then stresses EBITDA generation by assuming an accelerated 15% decline in attendance amounting to 43 million from a run-rate base of 50 million moviegoers (66 million attendance in 2019), slightly up ticket price and concession per patron levels, which don't offset assumed higher operating costs, resulting in high single-digit margins for the Film Entertainment and Content segment representing 60% of total adjusted EBITDA.

For the Media and Amusement segments, Fitch maintained a 15% decline in revenue but with a 30% and a 20% decrease in Media and Amusement margins, respectively. This results in a GC EBITDA of $152 million or roughly a 28% stress versus our run-rate base.

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 is a relatively cheap form of entertainment. However, the rise of alternative distribution platforms and streaming subscription plans with attractive entry-level offerings (e.g. Netflix, Hulu, Disney+, HBO Max etc.), including independent smaller format movies that are not dependent on exclusive theatrical windows, could place added pressure on theatrical exhibition in future downturns, particularly in urban areas where the cost of an average theater ticket might exceed $12. Fitch believes the theater loyalty programs like Cineplex's SCENE and CineClub programs could support attendance and higher per patron spending levels.

Multiple: Fitch employs a 5.5x 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 alternative distribution models (e.g. Netflix typically releases films in theaters and to its streaming subscribers simultaneously, with some limited exceptions for awards contention); (2) Cineplex leading market position in Canada with a wide-array of movie theater formats and experiences, attractive content offerings (Hollywood and International film studios), and limited revenue diversification from media and other forms of entertainment; (3) Recent trading multiples (EV/EBITDA) in a range of 6x-17x; (4) 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 $836 million.

Debt: Fitch assumes a fully drawn revolver in its recovery analysis since credit revolvers are tapped when companies are under distress. In addition, the company has $550 million of first-lien senior secured notes pari-passu with the revolving credit facility, and $216 million of unsecured convertibles (proforma for a $100 million prepayment using proceeds from the latest divestiture).

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 15% of its remaining $1.1 billion in operating lease commitments due to their significance to the operations in a going-concern scenario. This incorporates the importance of the leased space to the core business prospects as a going concern.

Cineplex had $766 million in total debt as of Dec. 31, 2023 (pro forma for the refinancing of its existing capital structure with the $550 million senior secured notes and a $100 million prepayment to the convertible notes using proceeds from the P1AG divestiture).

Under this scenario, the recovery value for the $100 million revolving credit facility and the $550 million of senior secured notes resulted in full recovery prospects at 'BB'/'RR1', reflecting an issue rating three notches above Cineplex's IDR.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Significant improvement in EBITDA margins in the low-to-mid teen digits, higher revenue and EBITDA contribution from its Media and Amusement segments, driving a higher free cash flow generation and notably increasing the scale of the company;

EBITDA leverage sustained below 5.5x and EBITDAR leverage sustained below 6.25x;

FCF margins sustained in the low-to mid-single digits.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

EBITDA leverage sustained above 6.5x and EBITDAR leverage sustained above 7.25x;

Significant deterioration in Cineplex's liquidity position;

Increasing secular pressure as illustrated in sustained declines in attendance and/or concession spending per patron.

Liquidity and Debt Structure

Adequate liquidity: As of Dec. 31, 2023, Cineplex's liquidity position was $272 million composed by $37 million in cash on balance and $235 million available under its existing RCF. Fitch expects FCF generation to gradually improve over the projected period in line with top-line and EBITDA recovery. The refinancing plan will meaningfully extend maturities at least three years for the new RCF, at least five years for the new senior secured notes and the converts to 2030 in exchange for a $100 million prepayment.

Issuer Profile

Cineplex Inc. is one of Canada's largest entertainment organizations, with 1,631 screens in 158 movie theatres and 13 location-based entertainment venues from coast to coast. Cineplex also operates businesses in digital commerce, cinema media, and digital place-based media through its wholly owned subsidiaries.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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