SAN FRANCISCO - As second-quarter earnings were released this month, bank executives offered reassurances that their diversified loan portfolios were unlikely to be subject to the kind of single-sector blowup that the stricken health-care industry produced last year.

But several of the biggest U.S. banking companies are sitting on credits to an industry that is showing signs of massive strain, according to analysts. Movie theater operators, including well-known names like New York-based Loews Cineplex Entertainment Corp. and AMC Entertainment Inc., are under severe pressure after years of rapid expansion - using leveraged bond and bank debt - that failed to generate the expected returns. Rosalind F. Looby, a regional banking analyst at Donaldson, Lufkin & Jenrette Inc., estimates that banks have about $5.1 billion in current loan commitments to the movie theater industry outstanding. While less than banks' exposure to health-care companies when they started to falter in 1998 after Congress passed changes to Medicare reimbursement laws, it's close enough for discomfort. Banks made a total of $7.8 billion in loans to health-care companies that year, according Portfolio Management Data, a unit of Standard & Poor's.

"If a lot of companies are involved in serious writeoffs, this could cause banks some headaches," said Ms. Looby.

Signs of weakness in the movie theater sector are hardly new. Analysts say they have been concerned with the industry for the last 18 months, as a wave of building across the country produced more movie screens than consumers can support. Patchy movie seasons, such as the recent Christmas openings, also hit attendance rates.

"You're pretty close to the bottom in leverage right now," said Bishop Cheen, an analyst at First Union Securities.

Which banks hold these loans? According to the movie theaters' initial filings with the Securities and Exchange Commission, the debt is spread amongst the biggest commercial lenders, including Bank of America Corp., Bankers Trust Co. (now owned by Deutsche Bank AG), Wachovia Bank, FleetBoston Financial Corp., and Canada's Bank of Nova Scotia.

Already one movie theater operator, United Artists Theatre Circuit Inc. of Englewood, Colo., has defaulted on its commitment - a $450 million facility led by Bank of America Corp.

Overexpansion has also hurt regional players, perhaps even more so because they don't have as much access to capital, said analysts. Dallas-based Silver Cinemas International Inc. filed for bankruptcy protection in May. Union Bank of California, a Bank of Tokyo-Mitsubishi affiliate that recently reported higher nonperforming assets, is among the banks that have lent to these companies.

Union Bank, with Bank of America as co-manager, led a $250 million credit facility to privately held Edwards Theatres Circuit Inc. of Newport Beach, Calif.

But the most revealing indication of the pressure on these companies is how their loans are trading in the secondary market. Movie theater operators loans, according to one trader, tend to trade at distressed levels, at about 70 cents to 85 cents on the dollar.

Some are in worse shape than others. For example, Regal Cinemas of Knoxville, Tenn., is considered to be more at risk of defaulting than others, Mr. Cheen said. He estimates the firm is carrying $1.6 billion in debt, $900 million from bank loans. And its revenues aren't keeping up.

Regal said in a 10-Q form filed May 15: "Based on the current level of operations and anticipated future growth, the company anticipates that its cash flow from operations, together with borrowings under the senior credit facilities and additional financing, should be sufficient to meet its anticipated requirements for working capital, capital expenditure, interest payments and scheduled principal payments."

Regal's loans, reflecting concerns over continued capabilities to meet debt commitments, are trading at the very low end of the scale. Its bonds - another indicator of credit quality - have been traded as low as 20 to 25 cents on the dollar, compared to the 40s for other movie chains.

Russell Solomon, a senior credit officer at Moody's Investors Service, agreed that Regal seems to be the movie theater company most at risk.

"It has almost twice as much debt as the next operator, and it's not twice as profitable, Mr. Solomon said.

In June, Moody's estimated that Regal's pre-rent cash flow was under the amount needed to cover forward interest and rents. That is in part because about 17% to 18% of its theater circuit is generating losses and needs to be closed.

"Regal could run into liquidity issues over the next 12 months," Mr. Solomon said.

Further burdening these operators is the fact that many of their new, lavishly built theaters - which include stadium seating, more screens, and better sound - are competing with their own older theaters in the same neighborhoods. And lease contracts make it prohibitively expensive for chains to shut these theaters down.

Industry experts estimate that about 20% to 40% of the current screens need to be closed.

"There's an overcapacity in screens and there will still probably be an overall growth in screens this year," said David Allen, a fixed-income analyst at Morgan Stanley Dean Witter.

Though he doesn't predict any defaults this year, "we don't expect any turn-around for the industry until 2001," Mr. Allen said.

Even if the summer produces some hits that drive revenues higher, it may not be enough to save some if these companies from credit problems, analysts said.

"There's no magic bullet here," Mr. Cheen said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.