Fitch Initiates Coverage on Regal; Assigns 'BB' to Secured Bank Facility; Outlook Stable.

NEW YORK -- Fitch has established ratings on Regal Entertainment Group (NYSE:RGC) and Regal Cinemas Corporation (Regal Cinemas) by assigning a 'B+' Issuer Default Rating (IDR) to both issuing entities. The rating action affects approximately $1.8 billion of debt outstanding at Sept. 28, 2006. The Rating Outlook is Stable. The summary of Fitch's ratings is as follows:

Regal Cinemas:

--IDR 'B+';

--Senior secured facility 'BB/RR2'

--Senior subordinated notes 'B/RR5'

RGC

--IDR 'B+'

--Senior unsecured convertible notes 'B-/RR6'

The ratings reflect the company's size and position as a leading theater exhibitor, solid geographic diversity, sound operating performance (third quarter 2006 revenue was up 7.5% to $675.7 million while EBITDA margins increased by 120 bps to 20.3%), and relatively stable free cash flow generation. Fitch notes that the company is the only major exhibitor in over 85% of the film distribution zones in which it operates. These strengths are balanced by the intermediate term risks associated with collapsing film distribution windows, increased competition from at-home entertainment media, heavy reliance upon a limited number of film distribution companies, limited control over revenue trends, high operating leverage which can make theater operators free cashflow-negative in a downturn, and a history of aggressive dividend payouts.

Fitch's outlook for the movie exhibition industry is stable in 2007 given a strong film slate; however, in establishing the long-term ratings, Fitch heavily weighed the current and prospective challenges facing RGC and its industry peers. Going forward, pricing is not likely to be under significant pressure, but attendance is expected to continue to remain exposed to indirect competition from other distribution channels such as DVD, home video and video on demand; particularly as film distribution windows continue to gradually collapse. In addition, exhibitor performance is tied to the quality of the motion pictures produced and distributed, a critical factor that is largely outside of management's control.

Ancillary revenues from on-screen and theater lobby advertising as well as the introduction of digital cinema provide some long-term growth potential. Regal pursues these opportunities through National CineMedia LLC (NCM LLC) which was founded as a joint venture among RGC (41.2%), AMC Entertainment Inc. (33.2%) and Cinemark (25.6%). The three majority owners have decided to sell a portion of their stake in NCM in an IPO expected to close in the first quarter of 2007. On the 3Q06 earnings call, RGC management stated that they expect to receive after-tax proceeds of approximately $400-425 million which will likely be distributed to shareholders.

Anschutz Company owns substantially all outstanding Class B common stock and as such controls over 75% of the voting power of all outstanding stock. Mr. Anschutz relinquished his board seat at the company's annual meeting on May 10, 2006 but is expected to retain a meaningful influence. Importantly, the company has actively returned capital to shareholders as evidenced by its history of special dividends and its high ongoing regular dividend payout. The company paid special and regular dividends totaling $175.9 million in 2005, $842.2 million in 2004 and $799.3 million in 2003. Existing and expected financial policies are consistent with the rating level.

Debt has grown steadily due to the modernization of its theatres and acquisitions. While characterized by a high fixed cost structure and meaningful maintenance capital expenditures, much of the modernization is complete and a portion of capital expenditures are expected to be discretionary in a downturn. Total leverage at the RGC level as of Sept. 28, 2006 was 3.6 times (x); however, Fitch focuses on adjusted leverage (as measured by total debt including operating leases to operating EBITDAR) at the RGC level which was 5.3x. Given the company's business risks, Fitch believes Regal is strongly positioned in the 'B+' category and that the company has capacity at its IDR for modest additional leverage.

Liquidity is adequate with cash of $80 million, $99 million available under the company's $100 million revolver, and free cash flow of $31 million as of Sept. 28, 2006. The company's maturity schedule is manageable with less than $30 million due in each of 2007, 2008 and 2009, excluding the convertibles described below which are due May 15, 2008. The company's liquidity is further supported by the working capital dynamics of the theater exhibition business. Days payables outstanding typically exceed 30 days while inventories are minimal and days in receivables are less than 5 days as most sales are settled in cash at the time of purchase. This positive working capital carry is a positive for the credit profiles of theater exhibitors in general.

On Oct. 27, 2006, Regal Cinemas Corporation entered into Fifth Amended and Restated Credit Facility which consists of a term loan facility of $1.7 billion due Oct. 27, 2013 and a revolving credit facility of up to $100.0 million due Oct. 27, 2011, which has a $30 million letter of credit sub limit. As of Sept. 28, 2006, there was $1,663.9 million outstanding under the senior credit facility. Regal Cinemas is in compliance with all covenants (as amended) with the most restrictive being the Maximum Consolidated Leverage Ratio of 4.0x. The leverage covenants are calculated on a net debt basis at the Regal Cinemas level.

RGC is the issuer of $240 million of convertible senior notes, which are structurally subordinated to Regal Cinemas' senior credit facility, and the 9 3/8% unsecured senior subordinated (OpCo) bonds. The convertibles were issued May 28, 2003 and mature May 15, 2008 and are convertible at the holders' option. At Sept. 28, 2006, there were $127.4 million convertibles outstanding. In financial ratios, Fitch assigned the convertible notes a class A (100% debt, no equity) consideration as defined under Fitch's updated hybrid securities guidelines (released Sept. 27, 2006 and available on the Fitch Ratings web site www.fitchratings.com). Per Fitch's guidelines, these notes are not considered mandatorily convertible, they are not loss absorbing, are not deferrable and are not permanent.

The Recovery Ratings (RR) and notching reflect Fitch recovery expectations under a distressed scenario. RGC's RRs 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 (going concern), rather than a liquidation. The 'RR2' recovery rating for the company's credit facilities reflects Fitch's belief that 71-90% recovery is reasonable given its priority position. The 'RR5' recovery rating for the operating company senior subordinated notes reflect Fitch's estimate that 11-30% recovery is reasonable. The 'RR6' recovery rating for holding company convertible senior unsecured notes reflect Fitch's estimate that negligible recovery would be achievable due to their deep subordination to other securities in the capital structure.

For additional information on the movie exhibitor industry, see 'U.S. Movie Exhibitor Outlook Stable in 2007', available on www.fitchratings.com.

Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.