S&P drops exhib Regal’s ratings to ‘junk’

Expansion-binge costs come home to roost

Regal Cinemas, the largest U.S. movie circuit by number of screens, was hit with Standard & Poor’s debt-rating downgrades Wednesday in yet another reflection of the exhibition industry’s financial woes.

S&P lowered Regal’s corporate credit and bank-loan ratings to triple-C from single-B, and ratings on its subordinated debt to double-C from triple-C-plus. All of the ratings are speculative, or “junk” grade.

In June, Moody’s Investors Service chopped its rating on Regal two notches, to Caa from B2, both junk grades. S&P said its actions reflect the ratings agency’s “heightened concerns” about Regal’s financial risk.

Regal said last week it’s trying to rework lending agreements for greater flexibility in its debt structure. The Knoxville, Tenn.-based company — which reported a broadened second quarter loss of $29.4 million compared with a year-ago $7.4 million — said it had $1.79 billion in debt on June 30.

Earlier this month, Carmike Cinemas became the third circuit to slide into Chapter 11 bankruptcy amid mouting debt pressures. That move was preceded by reorganization filings by WestStar Cinemas and Silver Cinemas. Meanwhile, several big circuits, including Loews Cineplex and AMC Entertainment, have suffered debt-rating reductions this summer.

Too much too soon

Analysts blame the difficulties on the circuits’ inability to pay for their collective expansion binge of the past few years.

“They’re all overbuilt and are cannibalizing business from their older locations with new multiplexes,” said analyst Arthur Rockwell of Rockwell Capital Management in Los Angeles. “They’ve got to bite the bullet and close some of these locations that are killing them.”

Rockwell added that circuits’ debt woes have been compounded by slumping attendance, but he blamed overly aggressive pricing rather than poor Hollywood product for the slide.

“They’ve raised ticket prices too much,” Rockwell said. “The reason attendance has been down is because of the pricing. They should be backing off and lowering prices if they want to raise revenue.”

At Regal, which operates 4,376 screens, high debt loads were piled higher by its 1998 acquisition by leveraged buyout firms Hicks, Muse, Tate & Furst and Kohlberg Kravis Roberts, he noted. “It was a highly leveraged circuit that with the leveraged buyout became even more so,” the analyst said.

(Dow Jones contributed to this report.)

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