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UK theater credit rating downgrades reflect sustained COVID-19 hit to box office


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UK theater credit rating downgrades reflect sustained COVID-19 hit to box office

S&P Global Ratings downgraded U.K.-based cinema operators Cineworld Group PLC and Vue International Bidco PLC and placed the two firms on a negative outlook for the year as box office forecasts were hit by virus fears.

Global cinema attendance is not expected to recover to pre-pandemic levels until 2022, partly as a result of public caution regarding out-of-home entertainment venues and Hollywood studios pushing back major film releases, the rating agency said.

The exhibition industry is also facing renewed lockdowns as authorities seek to curb the spread of COVID-19 until a treatment or vaccine is available, possibly in mid-2021, S&P Global Ratings analysts noted in actions issued Sept. 28. S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

Cineworld was downgraded to CCC-, marking the third time its credit rating has been lowered since cinema closures began in mid-March. Its peer Vue had its rating lowered to CCC+ from B-. Both companies face similar operational hurdles amid a hit to core revenue and an increase in costs that could see them struggle to reduce debt, according to S&P Global Ratings analysts.

Cineworld's total cinema admissions in 2020 are expected to fall by at least 70% to 80% compared with 2019, and 15% to 20% in 2021 versus 2019, the credit agency's report said. Lower attendance levels are also forecast to dent Vue's revenue by 50% in 2020, and 20% to 30% in 2021, compared with 2019. Higher costs include enhanced cleaning measures, deferred rent re-payments and increased interest rates.

"We now expect a much slower [box office] recovery in the fourth quarter of 2020 and first half of 2021, partly because studios continue to delay major film releases, and in the short-term there is not much new content to show in cinemas that could attract higher admissions," credit analysts at S&P Global Ratings said in an interview.

Cineworld's CCC- rating implies an increased likelihood of default or distressed exchange within the next six months due to its weak liquidity, which is expected to total $200 million to $250 million at the end of September. This includes Cineworld's cash on balance and financial arrangements including a revolving credit facility, or RCF, of $573 million.

The theater chain is assessing several options to boost liquidity, from additional debt to equity or semi-equity issuance, but these measures only offer support in the short-term, credit analysts at S&P Global Ratings said. A broader improvement in its credit quality requires an increase in cinema attendance, and the group's profitability and cash flow, allowing it to reduce its debt, they added.

Vue, on the other hand, had £110 million to £130 million of available liquidity at the end of August, including cash on balance and the undrawn portion of the £65 million-equivalent RCF maturing in 2025, according to S&P Ratings' estimates.

This could cover its costs for the next 12 months in line with improvements in its operational performance, the analysts said. It could boost liquidity with additional debt issuance, the analysts said, having recently obtained a waiver on its net leverage covenant for the next four testing periods. It could also negotiate further waivers or a reset of the covenant threshold, the report noted.

Nonetheless, Vue's leverage will remain very high at more than 9x, excluding shareholder instruments, until the conclusion of the financial year ending Nov. 30, 2021.

Unlike Cineworld, the firm could benefit from a lack of exposure to the U.S. and from the unique regulatory advantages and strength of domestic product in its main operating region of Europe, according to the report.

While the recent deal between operator AMC Entertainment Holdings Inc. and Universal Studios Co. LLC to reduce the theatrical window to as little as 17 days heaps pressure on U.S. rivals, Vue's U.K., Italy and German markets boast windows of between four to six months, the report noted. In these markets, there is little incentive for studios to pursue a policy change due to a relative lack of paid video-on-demand distribution channels throughout Europe.