Movie theater circuit Cinemark’s credit rating has been raised by S&P Global, a small sign of optimism that exhibitors can weather the impact of Hollywood strikes and pandemic-altered moviegoing habits.
The agency said it raised its ratings on the Plano, TX-based company’s secured and unsecured debt to ‘BB+’ and ‘BB-‘, respectively, from ‘BB’ and ‘B+. In a note about the move, S&P cited the end of the dual 2023 strikes and an increasingly “stable” outlook for 2024 and beyond.
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Sentiment on Wall Street and in the entertainment industry has been generally anxious about the viability of movie theaters with windows strategies shifting and the release slate lacking punch. Shares in Cinemark have been flat thus far in 2024 and well off their recent highs last fall, but the company’s financial condition has been seen as superior to that of rivals like AMC Entertainment. AMC stock has fallen more than 30% this year as investors have scrutinized its debt load, lack of new films and other factors.
“The impact of the actors’ and writers’ strikes will largely be limited to 2024,” S&P said in a note. The delays or cancellations of film productions have hurt theater owners and created “material disruption” to this year’s, the agency continued, meaning that Cinemark and other exhibitors “will be directly affected by reduced box office attendance.” In line with other forecasts, S&P said total domestic box office should fall about 10% this year, to between $8 billion and $8.25 billion. “While disruption to the release slate could spill into 2025,” S&P added, “we expect films pushed into 2025 from 2024 will help negate substantial disruption.”
While the overall tone struck by S&P was upbeat, the agency did issue some caveats. “Historically, cinema attendance has been relatively resilient during economic downturns due to the relative affordability of this out-of-home entertainment option,” the report said. “While we expect this trend to hold in general, the current state of the industry represents a unique set of challenges: average ticket prices are at an all-time high, and consumers have never had more options for how to consume video content in the home. In the event of an economic recession, consumers are likely to be increasingly sensitive to spending their discretionary income and may choose lower-cost in-home viewing options. Consequently, it may prompt exhibitors to adjust their pricing tactics for tickets and concessions, such that total revenue is less than currently planned.”
The credit agency expects Cinemark to keep its leverage ratio (a key measure of debt) “well below” four times its trailing 12 months of earnings. As of last Sept. 30, Cinemark’s leverage was at 2.9 times, S&P estimated. Adjusted EBITDA (a way of expressing earnings that is common in the media business) “would need to decline about 30% for Cinemark to breach the 4x threshold, a substantially greater decline than our current expectation of about 8%,” S&P added.
The agency expects Cinemark to generate more than $250 million in free operating cash flow in 2024 and to use those funds to pay down debt incurred during Covid as opposed to issuing dividends or other perks to shareholders. Cinemark, which has suspended its dividend, won’t reinstitute it until box office rebounds in 2025 or later. “We believe the company will continue to proactively address debt maturities as they arise, including the 8.75% senior notes and $460 million convertible notes due in 2025,” S&P added.
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