Unusual Regal deal prompts investors to zoom in on cinema credits

By Paul A. Harris

St. Louis, Mo., Jan. 9 - Two upcoming offerings from movie theater operators - including an unusual bond deal forming part of the Chapter 11 exit financing for Regal Cinemas Inc. - have focused investors' attention on whether the troubled sector has addressed its chronic problems of overcapacity, and an unpredictable supply of box office hits.

Regal Cinemas is planning to sell $200 million of senior subordinated notes due 2012 (B3/B-) next week via Credit Suisse First Boston. Along with $370 million of bank loans, the notes will finance Regal's emergence from bankruptcy as a reorganized company.

In addition, one of the few companies in the sector that has not visited the bankruptcy court, AMC Entertainment Inc., is currently roadshowing a $150 million offering of 10-year senior subordinated notes (Caa3/CCC), expected to price Friday via Salomon Smith Barney.

"Suddenly we're starting to see an awful lot more quotes around the theater and entertainment sector," Neuberger Berman High Yield Fund manager Robert Franklin told Prospect News Wednesday.

"It's just not clear to me that the supply and demand fundamentals for the sector have really changed," he added.

Franklin said he took a brief look at Regal Cinema's new offering but will not be playing.

"The whole industry overbuilt," he said. "Unless you start shutting down theaters it's not clear to me that the industry is ready to be strong yet.

"And we had an awful lot of good movies released this past year," Franklin added. "We had a couple of really good kids' movies. We had 'Pearl Harbor,' which kind of stank, but the hype was good enough to get a lot of people in. We had 'Harry Potter' and we had 'Lord of the Rings.'

"I'm not a studio analyst, and I'm certainly not a movie critic. But it's not clear to me that 2002 is going to have a ton of good movies."

Louise Rieke, manager of the Waddell & Reed High Yield Fund told Prospect News that an issuer such as Regal Cinema, which is emerging from Chapter 11 bankruptcy, needs to convince investors that it has in place solutions to the problems that caused it to seek protection from the courts in the first place.

"They have to tell investors 'We've closed a lot of unprofitable screens, we've gotten out of a lot of bad leases, we've cleaned up our act, and we have less leverage'," Rieke said.

A source on the sell-side, who told Prospect News he had taken a look at the Regal offering, brought up the house lights even further on the company's difficulties and its prospects for overcoming them.

"This is a company that was bankrupt," the source said. "Anschutz (Corp.) basically bought it by buying up all the debt, and exchanging it for the common shares.

"Now it's re-emerging from bankruptcy with a new capital structure. My guess is that it's going to look a lot like AMC Entertainment on a leverage and coverage basis."

The sell-side source said that overcapacity and disadvantageous leases, which stressed other cinema credits, had undoubtedly plagued Regal.

"They built too many theaters," the source said.

"And it was very difficult for them to get out of their leases because they basically leased property, and built a single-purpose asset, which was a theater. When you have that single-purpose piece of property no longer having any value, because no one's going to the movies anymore, that's fine. The problem is these guys signed long-term leases. So you've got an asset that doesn't provide enough revenue, and a lease that you continue to have to pay.

"When you drop into bankruptcy you're allowed under bankruptcy court rules to renegotiate the leases, and take the rates down, or just blow them up altogether. So Regal is going to come out of bankruptcy probably very low leverage."

Indeed, Regal Cinema's senior vice president of finance David Ownby told Prospect News that the company has reduced the number of screens it owns.

"Negotiations with landlords were an integral part of our reorganization," Ownby added. "Some of those negotiations are ongoing."

The rating agencies also noted Regal's shedding of under-performing screens and renegotiating more tenable leases.

In assigning it B3 rating to Regal's new notes, Moody's Investors Service noted: "As a result of the reorganization, Regal will be able to reduce its total properties by 25% to approximately 300 theaters and 3,600 screens."

Moody's further commented that Regal will also increase its average screens per theater from seven to approximately twelve.

And the ratings agency also remarked that the company has taken advantage of the ability to renegotiate currently unfavorable leases for theaters which are also expected to account for significant rent savings starting in 2002.

Standard & Poor's, in assigning the new Regal notes a rating of B+, also noted that the company's remaining screens will tend to be housed in comparatively "young" facilities.

In addition to the $200 million of junk bonds, Regal is in the process of obtaining a bank facility comprised of a $100 million senior secured revolver due 2007 and a $270 million senior secured term loan due 2008.

Regal's Ownby confirmed the bonds and the loan were part of the company's exit financing.

Both Franklin and Rieke said they had seldom seen bankrupt companies issuing bonds as they emerge from Chapter 11.

"The first time it was ever done was many years ago, when Continental Airlines was in bankruptcy," said Rieke. "They did a deal when they were in bankruptcy so they could come out of bankruptcy. So it's very rare but it has been done."

Continental emerged from bankruptcy on April 27, 1993.

End

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