Investors crushed shares in No. 3 U.S. exhibitor Carmike Cinemas on Wednesday, as the stock lost more than half its already deflated value a day after the circuit revealed problems tied to debt service.
Carmike shares closed down $1.75 at $1.50 on the New York Stock Exchange after trading 21 times the stock’s normal volume. Even before that plummet, the stock had shed 58% of its value this year amid concerns of overexpansion in the exhibition sector.
Earlier, the Columbus, Ga.-based company stressed it would be able to pay its debt for at least one to two years. That estimate came late Tuesday after the company also disclosed that its creditors had blocked payment of $9 million in interest payments on its debt because of violations of its loan covenants.
Like almost all movie exhibitors, Carmike has amassed high debt to finance the expansion of its chain of multiplexes amid aggressive industry expansion. But also like other circuits, Carmike said Tuesday it now plans to curtail new development and will focus on righting its finances as new revenue has failed to keep pace with expansion costs.
“The whole industry is suffering from a case of excess financial leverage,” said analyst Arthur Rockwell of Rockwell Capital Management in Los Angeles.
“One problem is that as they’re building new venues that are often megaplexes, they are losing money at the older theaters. Megaplexes are wonderful things, but they cannibalize existing theaters,” he said
Squashing old venues
Carmike and other exhibitors need to get over a reluctance to close older theaters, Rockwell suggested. “They’re just overbuilt right now, and the newer venues are killing the older ones,” he said.
Carmike said it plans to try to renegotiate terms of its loans to ease debt-service pressures.
Standard & Poor’s cut its rating on Carmike debt to “D,” representing a default on loan covenants. Moody’s Investors Service reduced its rating on Carmike — along with those of exhibitors Loews Cineplex Entertainment and AMC Entertainment — and cited signs that the company was overextended in its borrowings.
“We are not currently experiencing liquidity problems, and we are hopeful that our bank lenders will work with us to establish reasonable covenants that are more consistent with the economic downturn in our industry,” chief financial officer Martin Durant said.