Cinemark USA, Inc. -- Moody's assigns Caa1 rating to Cinemark's new senior notes

Rating Action: Moody's assigns Caa1 rating to Cinemark's new senior notesGlobal Credit Research - 04 Mar 2021Approximately $405 million of new debt ratedNew York, March 04, 2021 -- Moody's Investors Service ("Moody's") assigned a Caa1 rating to Cinemark USA, Inc.'s ("Cinemark USA") proposed $405 million 5-year senior notes offering. Cinemark USA's B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR), Ba3 senior secured bank credit facilities rating, Ba3 senior secured notes rating, Caa1 senior unsecured notes rating and negative outlook remain unchanged.Cinemark USA is a wholly-owned subsidiary of Cinemark Holdings, Inc. ("Cinemark" or the "company") and its ratings derive support from the parent, which is the financial reporting entity. Proceeds will be used to fully redeem the $400 million 5.125% senior notes due 2022 via a tender offer and pay transaction-related fees, including the tender premium. The new senior notes will rank pari passu with Cinemark USA's existing senior notes and contain the same joint and several upstream guarantees on an unsecured basis from certain Cinemark USA operating subsidiaries.Following is a summary of today's rating action:Assignment:...Issuer: Cinemark USA, Inc.$405 Million Senior Unsecured Notes due 2026, Assigned Caa1 (LGD5)The assigned rating is subject to review of final documentation and no material change to the size, terms and conditions of the transaction as advised to Moody's.RATINGS RATIONALEMoody's expects that the refinancing transaction will be leverage neutral since Cinemark's total debt quantum and financial leverage will remain relatively unchanged with pro forma total debt at 31 December 2020 staying at roughly $2.67 billion on an as-reported basis (approximately $4.0 billion, on a Moody's adjusted basis). Cinemark's total debt to EBITDA metric is not meaningful because the company's EBITDA was negative in 2020. Moody's views the transaction favorably given the extension of the 2022 debt maturity. Upon full extinguishment of the 5.125% senior notes, Moody's will withdraw the rating.Cinemark USA's B3 CFR is forward-looking and supported by the parent's (Cinemark Holdings, Inc.) position as the third largest movie exhibitor in the US. The rating reflects the company's materially weakened operating and financial performance, which has suffered from significant revenue losses during the five-month forced closure of Cinemark's global theatre circuit from mid-March to mid-August 2020 due to the coronavirus pandemic. The CFR captures the delayed reopening of the company's theatres following repeated postponement of several theatrical film releases during the summer months of 2020 and the possibility of further film release delays in 2021. Moody's also expects that seating capacity restrictions and lackluster moviegoer attendance for its reopened theatres will likely continue until vaccines are more widely administered. In 2020, Cinemark generated negative EBITDA of approximately -$277 million on an as-reported basis or roughly -$135 million on a Moody's adjusted basis. At 31 December 2020, 75% of Cinemark's domestic circuit and 65% of its Latin American circuit was open and operational. Many of the company's theatres in major metropolitan cities remain closed, although some large municipalities recently approved the reopening of theatres with capacity limits (e.g., the California Bay area in late-February and New York City in early-March).The rating also considers Moody's concerns that decisions by some of the major film studios to: (i) release their films, including blockbuster titles, on their streaming platforms and in theatres simultaneously; (ii) shorten the theatrical window for certain films; and/or (iii) forego wide theatrical release for some films and instead release them directly to streaming platforms, will likely depress Cinemark's profits over the next several quarters and keep financial leverage at an elevated level, especially given the company's sizable debt raises last year. As vaccines are more widely dispersed, Moody's expects this will lead to improved attendance levels and better operating performance on a sequential and year-over-year basis in Q3 2021 during the important summer box office season. Moody's projects Cinemark will continue to experience adequate liquidity, driven by the company's current cash burn of roughly $65 million per month, which will likely exhaust existing liquidity by early 2022 absent additional sources of liquidity or a sharp rebound in future attendance.The negative outlook reflects Moody's expectation for lower revenue and EBITDA this year compared to 2019 (albeit better than 2020) coupled with weakened liquidity as a result of the temporary closure of roughly 25% of Cinemark's global theatre circuit, seating capacity restrictions and weak moviegoer attendance at reopened theatres, as well 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 film studios continue to postpone releases of their movies or seek alternative distribution methods. For example, studios could increasingly release movies simultaneously to streaming platforms or much sooner than previously, or avoid theatrical release altogether. The negative outlook embeds Moody's view that Cinemark will experience negative operating cash flows in the first half of 2021 or until vaccines are more widely administered despite the company's efforts to reduce operating expenses.Cinemark's SGL-3 rating reflects adequate liquidity. Moody's projects negative free cash flow generation in 2021. This is chiefly due to EBITDA shortfalls and negative operating cash flow primarily in H1 2021 resulting from theatre closures, as well as seating capacity restrictions and weak moviegoer attendance for theatres that are currently open or will reopen later this year. It also results from Cinemark's increased interest expense burden as a result of its leveraged balance sheet. The company's cash burn is roughly $195 million per quarter ($65 million per month). Cash balances at 31 December 2020 were $655.3 million. Cinemark believes its cash position will allow it to sustain operations through the end of Q4 2021 if operating results do not improve from current levels, its unopened theatres remained closed indefinitely, and the company timely receives tax refunds expected later this year in connection with tax benefits related to NOL carrybacks that were allowed under the CARES Act. Nonetheless, Moody's is concerned that Cinemark's liquidity could be exhausted by early 2022, if it is unable to reopen its remaining theatres and/or moviegoer demand remains lackluster, which would force the company to raise cash via additional debt issuance, potentially pressuring ratings.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. Our analysis has considered the effect on the performance of corporate assets from the current weak global economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Owing to Cinemark's exposure to US and Latin American economies, the company remains vulnerable to shifts in market demand and business and consumer sentiment in these unprecedented operating conditions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe rating outlook could be revised to stable if Cinemark reopens its remaining closed theatres in 2021 (especially in major metropolitan cities), 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 continued weak operating performance and challenged debt protection measures. Over time, an upgrade could occur if Cinemark 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 remaining unopened cinemas and/or delays in lifting seating capacity restrictions or poor attendance levels at reopened theatres 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 cash outlays; (ii) poor execution on reducing or managing operating expenses; or (iii) limited prospects for operating performance recovery in 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 will likely remain 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 531 theaters and 5,958 screens worldwide with 331 theatres and 4,507 screens in the US across 42 states and 200 theatres and 1,451 screens across 15 countries in Latin America. Revenue totaled approximately $686.3 million for the fiscal year ended 31 December 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.REGULATORY DISCLOSURESFor 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. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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. 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