Fitch Upgrades AMC's IDR to 'B+'; Outlook Stable

Fitch Ratings has upgraded the Issuer Default Rating (IDR) of AMC Entertainment, Inc. (AMC) to 'B+' and revised the Rating Outlook to Stable from Positive. Further, Fitch has upgraded AMC's senior secured revolver and term loan by one notch to 'BB+/RR1', and AMC's subordinated notes by one notch to 'B/RR5'. A full list of rating actions follows at the end of this release.

The upgrade is primarily driven by AMC's operating performance resilience during 2014 (admission revenue decline of 4.5% vs. industry-wide decline of 5.2%), driven by success of the company's various strategies. Even with consolidated revenue decline in 2014 of 2%, AMC was able to drive admission revenue per attendee by 1.7%, concession revenue per attendee by 7.9%, concession gross profit per attendee by 7.4%, and increase EBITDA margins slightly to 15.9% for FY2014. AMC's operating performance has enabled AMC to hold adjusted leverage below 5.5x at a time when Fitch believes the industry is at a trough in terms of attendance, which is consistent with a 'B+' rating for this industry. In strong-performing box office years, metrics may be stronger in order to provide a cushion for weaker box office years.

Through improvements in operations and reduction in absolute levels of debt, AMC has driven unadjusted gross leverage from 8.7x in 2011 to Fitch estimated 4.3x as of Dec. 31, 2014.

AMC has demonstrated traction in key strategic initiatives, as can been seen in its improving admission revenue per attendee, concession revenue per attendee, and concession gross profit per attendee. Fitch calculates Dec. 31, 2014 latest 12 months (LTM) EBITDA margins of 15.3% (excludes National Cinemedia distribution), an improvement from 13.6% at Sept. 27, 2012. Fitch recognizes that AMC's expected investment into premium food offerings will pressure high concession margins; however, growth in the top line should grow absolute gross profit dollars in this segment.

AMC Entertainment Holdings Inc. (AMCH) instituted a quarterly dividend of $19.5 million ($78 million for the full year), with the first dividend paid in 2Q'14. In conjunction with elevated capital expenditures relative to historical periods, the dividend will pressure free cash flow (FCF). Fitch has modeled capital expenditure spending of approximately $255 million and $270 million in 2015 and 2016, respectively. As a result, Fitch expects FCF will range from zero to positive $50 million over the next two years. LTM FCF at Dec. 31, 2014 was negative $26 million.

Fitch believes that AMC has sufficient liquidity to fund capital initiatives, make small theater circuit acquisitions, and cover its term loan amortization. Liquidity is supported by cash balances of $218 million and availability of $135 million on its secured revolver as of Dec. 31, 2014.

KEY RATING DRIVERS

AMC's ratings reflect Fitch's belief that movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.

Despite a low growth rate in 2013 box office performance (up 0.8%), 2014's film slate delivered negative growth in box office revenues, down 5.2%, according to Box Office Mojo. Industry-wide attendance declines of 5.6% were offset minimally by a 0.5% increase in average ticket price, and year-over-year comparisons will prove easy in 2015. As in the past few years, there are many high-profile sequels that have a strong likelihood of box office success. The releases of 'Avengers: Age of Ultron', 'Bond 24', 'The Hunger Games - Mockingjay - Part 2', 'Avatar 2', and 'Star Wars: Episode VII' headline a strong film slate. Fitch believes the film slate will support industry-wide box office revenue levels with low- to mid-single-digit increase in attendance and a slightly increased average ticket price.

Fitch believes the investments made by AMC and its peers to improve the patron experience is prudent. While capital expenditure may be elevated in the near term and concession high margins may be pressured over the long term, Fitch believes that the exhibitors will benefit from delivering an improved value proposition to its patrons and that the premium food services/offerings will grow absolute levels of revenue and EBITDA.

The ratings factor the intermediate/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, collapsing film distribution windows, and increasing indirect competition from other distribution channels (such as DVD, VOD, and OTT). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance and that any potential attendance declines will offset some of the growth in average ticket prices.

In addition, AMC and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.

KEY ASSUMPTIONS:

Fitch's key assumptions within the rating case for the issuer include:

--Attendance growth in the low- to mid-single-digit range;

--Average ticket price growth in the low- to mid-single-digit range;

--Increasing margin due to operating leverage on higher ticket prices driven by premium offerings, offset by lower margin from the food and beverage initiatives;

-- FCF of zero to positive $50 million over the next two year.

LEVERAGE AND LIQUIDITY

AMC's liquidity is supported by $218 million of cash on hand (as of Dec. 31, 2014) and $135 million availability (net of letters of credit) on its revolving credit facility, which is sufficient to cover minimal amortization payments on its term loan.

The company has a manageable maturity schedule, which consists of:

--Revolver due in 2018;

--$600 million in subordinated notes and $771 million term loan (amortizing at $7.5 million per annum) due 2020;

--$375 million in subordinated notes due 2022.

RECOVERY RATINGS

AMC's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, hence, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates an adjusted, distressed enterprise valuation of $1.4 billion using a 5x multiple and including an estimate for AMC's 15% stake in National CineMedia LLC (NCM) of approximately $88 million.

The 'RR1' Recovery Rating for the company's secured bank facilities reflects Fitch's belief that 91% - 100% expected recovery is reasonable. While Fitch does not assign Recovery Ratings for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining $2.3 billion (calculated at a net present value) in operating lease commitments due to their significance to the operations in a going-concern scenario and is liable for 15% of those rejected values.

AMC's senior subordinated debt reflects the expected full redemption of AMC's senior unsecured notes. The 'RR5' Recovery rating on the subordinated notes reflects an expected recovery range of 11% - 30%.

RATING SENSITIVITIES

Positive Trigger: Fitch heavily weighs the prospective challenges facing AMC and its industry peers in arriving at the long-term credit ratings. Significant improvements in the operating environment (sustainable increases in attendance from continued success of operating initiatives) driving FCF/adjusted debt above 2% and adjusted leverage below 4.5x on a sustainable basis could have a positive effect on the rating. In strong box office years, metrics may be strong in order to provide a cushion for weaker box office years.

Negative Trigger: A debt-financed material buyout, acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 5.5x could have a negative effect on the rating. In addition, meaningful, sustained declines in attendance and/or per-guest concession spending that drove leverage beyond 5.5x would pressure the rating as well.

Fitch has upgraded the following ratings for AMC:

--IDR to 'B+' from 'B';

--Senior secured credit facilities to 'BB+/RR1', from 'BB/RR1';

--Senior subordinated notes to 'B/RR5' from 'B-/RR5'.

The Rating Outlook has been revised to Stable from Positive.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'AMC Entertainment, Inc.' (Oct. 13, 2104);

--'Credit Encyclo-Media: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector (Volume VII, 2014-2015)' (Oct. 2, 2014);

--'An Exclusive Preview: Fitch's 2014 Movie Exhibitor Outlook and Analysis' (May 21, 2014).

Applicable Criteria and Related Research:

An Exclusive Preview -- Fitch's 2014 Movie Exhibitor Outlook and Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=734795

Credit Encyclo-Media: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector (Volume VII, 2014-2015)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=787688

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980503

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