S&P Downgrades Cinemark Credit Rating to ‘Highly Speculative’

Standard & Poors Global Ratings on Monday downgraded Cinemark’s credit rating to B+ from BB-, putting the theater operator’s borrowing power at “highly speculative.” Cinemark reported a loss of $170 million for its most recent second quarter. The theater chain said it had $571 million of cash on hand as of June 30, with a cash burn at roughly $50 million per month. Cinemark began reopening some of its theaters late last month and will continue to reopen theaters later this week. “We continue to believe Cinemark will have more than sufficient liquidity to fund its operations until theaters return to normalized attendance, but we now expect the company’s leverage to remain above our 4x downgrade threshold through 2021,” S&P analysts wrote in a note. “Attendance will not return close to 2019 levels until a vaccine or treatment has been developed and social distancing is no longer required. We now expect leverage to remain above 4x through year-end 2021 and cash flow will remain thin after factoring in deferred lease payments.” S&P kept Cinemark on a negative credit watch, but said it intends to resolve the it when theaters open, or if there is an update to the re-opening plan, giving analysts a better look into attendance and revenue levels over the rest of 2020. During the second quarter, Cinemark managed to reduce its lease expense by 27% and defer $40 million of its remaining $65 million in liabilities. The lower expenditures should benefit Cinemark relative to its peers, allowing the company to achieve theater-level profitability at a lower attendance level, S&P analysts said. Analsyts suggest that Cinemark has enough cash to remain closed for up to another 12 months, but note that as attendance slowly returns once theaters re-open the chain will continue to burn cash, albeit at a much lower rate. “We forecast it could take three-to-four months after reopening for the company to reach neutral cash flow,” S&P analysts wrote. “Therefore the company’s cash runway could be threatened if it does not open in the next six-to-nine months. That said, this timeline provides considerable cushion as the company plans to begin re-opening on Aug. 21.” S&P said it could see lower the rating further if a resurgence in the coronavirus pandemic causes additional delays in film release schedules to the point that domestic theaters wouldn’t expect to open in the third quarter. At this point, nothing is out of the realm of possibility. Last week Disney said that in the U.S. its live-action blockbuster “Mulan” reimagining would forgo theaters for now and head straight to streaming. And Warner Bros. still has yet to give “Tenet” a domestic release date. Cinemark is still in a better position credit-wise moving forward than AMC. S&P on Friday raised AMC’s credit rating to CCC+, meaning the company is at “substantial risk,” from its previous SD, or “selective default” — when an issuer is in default on one or more of its obligations — rating.