Approximately $2.15 billion of outstanding and committed rated debt impacted
New York, February 27, 2023 — Moody’s Investors Service (“Moody’s”) upgraded Cinemark USA, Inc.’s (“Cinemark USA”) Corporate Family Rating (CFR) to B2 from B3, Probability of Default Rating (PDR) to B2-PD from B3-PD, senior secured debt ratings to Ba2 from Ba3, and senior unsecured notes to B3 from Caa1. The Speculative Grade Liquidity rating remains unchanged at SGL-2. The outlook was revised to stable from positive.
Following is a summary of today’s rating action:
Upgrades:
..Issuer: Cinemark USA, Inc.
…. Corporate Family Rating, Upgraded to B2 from B3
…. Probability of Default Rating, Upgraded to B2-PD from B3-PD
…$100.0 Million Gtd Senior Secured Revolving Credit Facility due 2024, Upgraded to Ba2 (LGD2) from Ba3 (LGD2)
…$626.5 Million (Outstanding) Gtd Senior Secured Term Loan B due 2025, Upgraded to Ba2 (LGD2) from Ba3 (LGD2)
…$250 Million 8.750% Senior Secured Notes due 2025, Upgraded to Ba2 (LGD2) from Ba3 (LGD2)
…$405 Million 5.875% Senior Unsecured Notes due 2026, Upgraded to B3 (LGD4) from Caa1 (LGD4)
…$765 Million 5.250% Senior Unsecured Notes due 2028, Upgraded to B3 (LGD4) from Caa1 (LGD4)
Outlook Actions:
..Issuer: Cinemark USA, Inc.
….Outlook, Changed To Stable From Positive
Cinemark USA is a wholly-owned subsidiary of the parent entity, Cinemark Holdings, Inc. (“Cinemark” or the “company”), which is the financial reporting entity and guarantor of Cinemark USA’s bank credit facilities.
RATINGS RATIONALE
The ratings upgrade reflects Moody’s expectation that Cinemark will increase EBITDA, demonstrate improved credit protection measures and generate $100 – $120 million of free cash flow (FCF) in 2023 (assuming no dividend payments). The upgrade also recognizes the company’s sensible debt capital structure and financial policies given that new theatrical release volumes and North American box office receipts are expected to remain below the cinema industry’s pre-pandemic peak. Despite this, Cinemark will continue to experience favorable operating performance amid growing attendance levels at the global box office driven by a robust movie slate in 2023 with more than 25 big franchise and blockbuster films scheduled to debut.
Cinemark USA’s B2 CFR is supported by the parent’s, Cinemark’s, position as the third largest movie exhibitor in the US and meaningful presence in Latin America. Cinemark’s credit profile reflects the improving operating and financial performance, which suffered from pandemic-induced revenue and operating losses in 2020 and 2021 when theatres were closed or not fully operational, and delayed recovery when they reopened. Moody’s expects continued profit improvement, positive FCF and good liquidity driven by a strong theatrical release schedule this year, growing moviegoer attendance, increasing new release volumes, and the expectation that most of the big studios will adhere to the 45-day theatrical window for major film releases. Nevertheless, there is some uncertainty surrounding Disney’s adherence to the window for a few of its movies as well as inflationary concerns and recessionary pressures that could dampen moviegoer demand over the coming quarters.
The ratings also consider Cinemark’s high financial leverage, currently around 6x total debt to EBITDA, which Moody’s expects to decrease to the 4.5x-5x range over the rating horizon (all metrics calculated and adjusted by Moody’s). The cinema industry’s structural challenges are similarly captured in the profile, including: (i) excess screen capacity in North America, which will eventually require further reduction; (ii) comparatively lower moviegoer demand as studios simultaneously release some films online via SVOD/PVOD or potentially release them downstream in a shortened theatrical window; (iii) lower theatrical release volumes relative to historical levels due to production bottlenecks; (iv) reduced show times compared to pre-pandemic periods; and (v) the impact from some cost-conscious consumers reducing their out-of-home entertainment and number of trips to the cinema amid affordable subscription-based VOD movie viewing in an economic environment with high inflation.
The stable outlook reflects Moody’s view that Cinemark will continue to experience good moviegoer demand, higher average ticket prices per patron and a greater proportion of higher margin concessions revenue, which will support organic revenue growth and expanding EBITDA margins over the course of the year. Moody’s expects Cinemark will continue to effectively manage operating expenses to improve profitability. However, owing to the measured cyclical recovery of the box office that is expected to be 20%-25% below its historical peak as well as concerns that the weakening global economy could moderate attendance growth, the company’s financial leverage will remain high. While the outlook considers the impact of higher inflation and potential recessionary pressures, which could slow margin expansion and moderate revenue growth amid rising operating expenses and a pullback in consumer spending, the average cost for a movie ticket remains a relatively inexpensive form of out-of-home entertainment.
Cinemark USA’s SGL-2 rating reflects good liquidity over the next 12-18 months supported by solid cash balances (cash at the parent totaled $674.5 million at 31 December 2022) and positive FCF generation. Assuming Cinemark refrains from paying dividends, Moody’s projects FCF will increase to the $100 – $120 million range in 2023 compared to approximately $11 million in fiscal 2022 (FCF as calculated and adjusted by Moody’s). Though Moody’s forecasts Cinemark’s EBITDA will grow this year, it will remain below pre-pandemic levels. Interest expense will continue to be higher than prior to the health crisis due to the leveraged balance sheet, however Moody’s expects near-term borrowing costs will stay relatively flat arising from interest rate swaps and a fixed rate debt capital structure. Liquidity is further supported by an undrawn $100 million revolving credit facility (RCF) maturing November 2024.
ESG CONSIDERATIONS
Cinemark’s ESG Credit Impact Score is highly negative (CIS-4), reflecting the company’s neutral-to-low exposure to environmental risks and highly-negative exposures to demographic and societal trends, as well as governance risks.
Environmental risks are neutral-to-low (E-2) across all categories. The nature of Cinemark’s media activities, with limited exposure to physical climate risk and very low emissions of pollutants and carbon, results in low environmental risk.
Cinemark’s credit exposure to social considerations is highly negative (S-4) driven principally by demographic and societal trends. This risk is associated with lower moviegoer attendance compared to pre-pandemic levels as an increasing number of new first-run films are now distributed via SVOD and AVOD streaming platforms by the major movie studios within a shortened theatrical window at competitive pricing to the consumer. Though moviegoing demand has accelerated owing to a more consistent cadence of new films with broad consumer appeal since the pandemic abated, Moody’s expects annual North American box office receipts and new theatrical release volumes will remain below the industry’s peak in 2019 and 2018. There is limited exposure to customer relations, human capital, health & safety and responsible production risks.
Credit exposure to governance risks is highly negative (G-4) due to Cinemark’s high financial leverage (albeit declining), offset by positive free cash flow generation and good liquidity. Additional mitigants include neutral-to-low exposure to organizational structure, compliance & reporting and board structure risks. Cinemark maintains an independent board and separation of roles for the CEO and board chair. Management has a good track record of reducing operating costs and enhancing liquidity during the health crisis and quickly improving credit metrics following easing of pandemic restrictions relative to its cinema peers.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if Cinemark experiences positive growth in box office attendance, stable-to-improving market share, positive and expanding EBITDA with margins approaching pre-pandemic levels 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 approaches the 4x area (Moody’s adjusted) and positive free cash flow as a percentage of total debt exceeds 5% (Moody’s adjusted).
Ratings could be downgraded if there was: (i) an exhaustion of the company’s liquidity 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 2023. A downgrade could also be considered if Moody’s expects total debt to EBITDA will remain above 6.5x (Moody’s adjusted) or free cash flow to total debt decreases to the 2% area or lower 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 518 theatres and 5,847 screens worldwide with 318 theatres and 4,399 screens in the US across 42 states and 200 theatres and 1,448 screens across 15 countries in Latin America. Revenue totaled approximately $2.45 billion for the twelve months ended 31 December 2022.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.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 https://ratings.moodys.com.
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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.
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JOURNALISTS: 1 212 553 0376
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