Now playing: shift to cinema superstores, says AMC Entertainment CFO

By Paul A. Harris

St. Louis, Mo. Jan. 11 - In the run-up to AMC Entertainment Inc.'s Friday pricing of its upsized $175 million of 10-year notes, the buy-side and the ratings agencies zoomed in on the cinema sector's travails: too much movie house capacity resulting in unfavorable lease agreements with owners of the properties on which they are built, and an unreliable stream of quality motion pictures.

However, soon after AMC's deal priced, the company's chief financial officer Craig R. Ramsey told Prospect News that the competitive forces at play in his sector are utterly familiar ones.

"This is just a superstore transition that we're in," Ramsey said. "That's all it is. It happened in the bookstore business. It happened in the home improvement business. It happened in a lot of different retail businesses, where you go from the smaller store to the big store that has more customer conveniences, and so forth.

"That's all that's going on here."

Although AMC is one of a very few cinema chain owners that has not been to bankruptcy court, the company's new bonds came saddled with the dreaded "triple-hooks" - Moody's Investors Service rated the notes Caa3, and Standard & Poor's assigned its CCC rating.

One sell-sider recently compared AMC to Regal Cinema, whose $200 million offering of 10-year notes is currently on the road and expected to price during the week of Jan. 14. Regal's notes are part of a $570 million exit financing packaging as the company emerges from Chapter 11. Regal's B3 rating from Moody's and B- from Standard & Poor's ratings, however, are considerably higher than AMC's.

"Bankruptcy in this context is a good thing because you can control your capital structure," this sell-sider explained. "If you can come out with low enough leverage then you're set."

This sell-sider's line of reasoning prompted a passionate response from AMC's Ramsey, who wondered aloud, and vehemently, how equity holders, bondholders and the banks fare in such a calculation.

"Let me give you our view of that, because we have been asked about that," the AMC CFO said. "We don't think it's even a consideration to think about bankruptcy. And there will absolutely not be any competitive disadvantage to us.

"The reason we didn't go into bankruptcy: two words: 'quality assets.' We have the best theaters in the business. There isn't a bankruptcy process in the world that takes bad theaters and makes them good."

Alluding to Regal Cinema's higher credit rating and lower leverage as a result of its emergence from Chapter 11, Ramsey said: "They may start at lower leverage, but this is a long-term game; it's a long-term value proposition. And our assets will be the best in the business for a long time."

Ramsey also addressed another concern aired by the buy-side and the ratings agencies, as the cinema credits rolled into play in the early 2002 high yield primary market: the supply of hit movies.

"If you watch this business on a week-in, week-out basis you'll go crazy," he said. "But if you look at the business since 1995, the North American box office has grown every year with a compound annual growth rate of 7%. Last year, calendar 2001, it looks like we're going to do about $8.4 billion. And that's as good as it's been for a long time.

"So this is a good business. We do rely on good pictures. There are only about 400-plus wide-release pictures in a year. We think that the studios will be able to eke out a few pretty good titles, with that many."

End

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