Cineworld debt pile set to save cinema operator from bankruptcy

Cineworld is expected to skirt bankruptcy for the second time in two years, say lenders, despite the UK cinema group facing an almost $1bn payout that exceeds its market value for pulling out of a deal to buy Canadian rival Cineplex.

The world’s second largest cinema operator has appealed against the court-awarded damages, but investors in Cineworld’s debt expect the two companies to strike a deal for a significantly lower amount even if unsuccessful.

That is because if Cineworld were pushed into bankruptcy by the damages, Cineplex would be near the back of the queue of creditors to be paid, multiple lenders told the Financial Times.

The group’s debt pile stood at $4.6bn at the end of June 2021, according to its most recent filings.

The legal wrangle between the two companies comes as cinema operators worldwide battle to resuscitate revenues that were wiped out during the worst of the coronavirus pandemic.

“From a strategic point of view, Cineworld is in a pretty good position even though they are facing this huge judgment,” said one lender to the company.

The Cineplex claim stems from Cineworld’s annulment in June 2020 of a deal struck six months earlier to buy the Canadian group for $2.3bn. The two companies subsequently sued each other over breaches of contract and a Canadian court awarded Cineplex C$1.23bn ($950mn) in damages in December 2021 — more than the London-listed company’s current £530mn market value.

But due to the way that the deal was structured, Cineworld could leverage its already high debt load to push Cineplex into accepting a lower payout.

Cineworld set up a Canadian legal entity to conduct the acquisition. As the deal fell apart, the legal entity was left as “an empty box” with no assets, according to the lender, so Cineplex’s claim falls to the entity’s holding company, Cineworld Group PLC. 

Partly due to lockdown closures pushing Cineworld to raise emergency financing, and in part due to its existing debt load, the company is already on the hook for billions of dollars in loans to asset managers including Eaton Vance and Credit Suisse Asset Management.

These loans are secured against the company’s assets, which typically take priority payment in bankruptcy. “In a bankruptcy [Cineplex’s] claim will get literally almost nothing,” said a distressed debt investor.

“As a first lien creditor ourselves, we are not going to let a junior claim get paid ahead of us,” said another loan holder. “There is the idea that Cineplex also gets the joke.”

Cineplex declined to comment on its position. Cineworld also declined to comment.

Last week, Cineplex filed a cross-appeal against Cineworld’s challenge to the court ruling. The Canadian group argued that if the original damages are struck out, the court should consider a list of other claims that range from C$714mn for liabilities that would have been covered by Cineworld had the deal completed to C$1.3bn for lost compensation to Cineplex’s security holders.

Still, any new claim would remain subordinate to secured creditors in bankruptcy, giving Cineplex little benefit in forcing Cineworld down that path.

“Any waterfall of payments in a situation of insolvency or restructuring would require addressing the priority of different claims,” said Abigail Klimovich, an analyst at S&P Global Ratings. “The collateral definition is quite specific in terms of the claim for secured debt holders. Any other claims that do not have specific access to the collateral would rank junior to the secured debt creditors.”

Cineworld, which operates in 10 countries, has pointed to positive signs for cinemas should it survive this latest threat of bankruptcy. It said that with the release of Spider Man: No Way Home, which became the first film to gross more than $1.5bn at the box office since the start of the pandemic, revenues had reached 88 per cent of 2019 levels across its 751 cinemas in December.

But Cineworld is not out of the woods. Klimovich said that a further rise in Covid-19 cases impacting people’s willingness to attend the cinema, or delaying the release of blockbuster films could still impair the company as it seeks to pay down its debts.

In order to boost its cash position, Cineworld said on Tuesday it had entered into negotiations to delay payment of a separate $170mn settlement owed to shareholders in Regal, the US cinema network it bought in 2017.

“They need to resolve their acute liquidity problems and their capital structure then there is the litigation issue, but it is not the main problem at the moment,” said Klimovich.