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‘Cineworld is the most shortest stock in the UK’
Yes, yes, most short data trackers mention cineworld as the most shortest stock in the UK. But what does that mean? Is it because most short investors target share price decline? Do they believe cineworld to go bust?
Please, do your research, before you spit some scary one-liners like giantsquid likes to do here.
Firstly, it is reported 8% of the shares are shorted. Please, bear in mind that investors like highbridge capital and whitebox advisors are specialised in distressed debt situations and very likely involved in the convertible bond of cineworld. As a result of that they typically hedge their exposure in the convertible by shorting the shares. Combined short position for these two is 4% (which is half of the shorts outstanding). They have done similar investments I believe in AMC before, where they see it is attractive to get involved in a convertible bond which will be converted into much higher value of equity over time.
Secondly, since the court ruling of cineplex in december, how many new shorters have you seen in the shares? How many new hedge funds have reported to short cineworld as a result of the outcome of the canadian court ruling? We have seen MINOR changes by the existing parties that are short the shares and we have seen that K2 associates reduced their short (have taken profit, which i deem fair. Very little new hedge funds have shorted the shares since the negative news. If it would all be that straight forward that cineworld would face default or a huge equity dilution, please believe me you would have seen much more new smart hedge fund guys reported short positions at cineworld’s shareholdership.
In this case, you need to hold on. Don’t listen to these dumb investors like giantsquid, since i am on this forum I haven’t seen ANY intellectual / smart comment of giantsquid. All elements he mentions are not new: debt pile, covid recovery,.. blabla. We all know this.
@hexam and @giantsquid
1) base case scenario; well spotted that CINE indeed lowered their own base case scenario. You could question, what’s the driver behind that? On the one hand, you can argue that the recovery is going to be weaker than anticipated because indeed some individual blockbusters aren’t saving the total BO. On the other hand, cineworld’s structural cost saving actions have resulted in better cost savings than initially expected. On top of that, the fact that the spend per consumer is up stronger than anticipated (which are high margin business), also allows the company to take into consideration a lower recovery vs 2019 to reach a base case scenario.
2) appeal: we should hear anytime soon something on cineworld having submitted the appeal.
3) cash generation: importantly, looking at data for the UK in terms of admissions, since march, we are very close to 2019 levels and that continues to improve day by day. Of course, our biggest market is US, which is still lagging behind. Whilst it isn’t an excuse, march/april 2019 were very strong thanks to the performance of avengers, making it a tough comp. I believe the coming 6 weeks will be a more fair representation of what we should expect and whether it is really time to become very cautiously.
I have seen some articles posted recent week (eg Investingcube) of which the title screens scary, but the content / fundamental explanation proves little knowledge of finance, distressed debt and capital structuring. Below, I explain you why I believe an equity raise is currently not looming around the corner.
Firstly: debt covenants are tested if more than 35% is withdrawn of the $456m RCF. As such, Cineworld will need to repay $296m by end June to avoid debt covenants testing. Next to that, it has only a min. liquidity covenant of $100m on the condition that it has not experienced 3 consecutive months in which group admissions levels have exceeded 80% of 2019 levels. Lastly, it still needs to pay $90m to Regal shareholders over first half 2022. Cineworld had $350m cash at hand at end 2021. Yes, a lot depends on how good/bad q1/q2 will be, if we will see positive cash flow generation or not, but you can do the math yourself, it is not unrealistic.
Important to know: 1) looking at the liabilities (eg payables specifically), no special elements are seen (like deferred bills or something); 2) increasing revenues (likely to be the case for q1/q2) at cinemas imply positive working capital inflow; and 3) if it is really necessary, management can still play with their cash (like: planned apex in 1h22 can be incurred, but with payment deferred after the covenant testing).
Secondly: why the hell would a debt for equity swap take place now? This argument does not make ANY sense.. Which debt holder is currently interested in converting debt into equity, with the overhang of the cineplex court ruling still being at the disadvantage of cineworld’s equity holders with the risk of being UNSECURED while they currently are as a debtor. Lastly, which debtor is subsequently first in row for a debt for equity swap?!
Thirdly: in general, raising equity at these levels, what amount do you need considerable ?! Look, if they want to raise equity, let’s assume to simply pay back the RCF (456m), you have an equity dilution effect of 100%. That’s absolutely not at the interest of our largest shareholder, CEO Mooky. In addition, in such a scenario, are the issues solved? No, I don’t think so, because there is still a debt pile of $4.7bn pending (ceteris paribus). Which fools are willing to put so much equity at once, when you still have the overhang of the cineplex court ruling?!
Overall, there are really very little fair and correct arguments, why cineworld would opt to go for an equity raise particularly at this stage and levels. They haven’t done it in the past two years, when it would be more easily to do, I see no fair arguments why they will do it now.
Again, an equity raise will only take place when an inflection point is there (out of court settlement or winning the appeal) and shares haven risen to higher levels. Only than, it makes sense to raise equity.
I notice plural comments of people questioning why mooky is not buying?!
Please, be realistic. It is 300% sure they are HUGELY restricted in being involved at this particular moment in the equity of the shares.
Why?!
1) there is A LOT ongoing behind the scenes, that is extremely share price sensitive, such as, capital structure negotiations, getting a waiver or not, publishing the company is fcf positive or not, having finalized discussions with landlords on deferral of rent payments,.. and so on!
2) in the framework of the ongoing litigation case of cineworld vs cineplex, mgmt is under highly supervisory of all lawyers on what they can communicate/comment/publish in press releases, analyst calls, interviews,.. subsequently, you can be 100% sure they are FULLY restricted in acting (buying or selling) shares.
Over the last week, I have seen plural incorrect/wrong statements and/or arguments (oa by giantsquid), therefore, I can consider it useful to share my view on the following topics:
- court ruling Cineplex: we have seen different specialised canadian law firms sharing their view on this litigation example. Some argue that the court ruling can be considered as unprecedented from different point of views. Potential synergies for the acquirer were taken into account for the seller’s damage fee?! In addition, no elements of cost of debt financing for funding this deal and the risk accompanied with this were taken into account. In addition, the fact that cineplex is looking for other ways of remuneration confirms that: 1) they are aware they are an unsecured debtor and in a scenario of default, are the latest in line, 2) cineplex’ share price does not reflect ANY believe they will see a significant amount of this damage fee, 3) IF cineworld loses the appeal, cineplex has little success, given cineworld has ANY assets in canada, will need to further litigate cineworld in UK, and there is little chance it will get that far and the UK court will agree to the same amount of damage fee.
- covenant breach: again, cineworld has only debt covenants on its RCF. If more than 65% is withdrawn from the 420m RCF, they will be tested on LTM EBITDA (incl. Adjustments and expected cost savings) to be below 5x nd. Other options are: 1) pay back more than 35% which should be feasible, 2) get a waiver (like before, but at some cost) and 3) refinance existing expensive debt items by cheaper alternatives.
- equity dilution: since the pandemic, cineworld has not raised ANY equity so far (only quasi equity instrument is the convertible they raised last year). With an improved market wherein they operate, but a clear overhang of the cineplex dispute, it is not likely they will raise equity at these levels, as the company is generating CF positive, has a better negotiation position with debtors and is waiting for an inflection point (eg settlement with cineplex out of court or winning the appeal) in order to restructure capital of the company.
- audit: important to know, the audit firm has signed off the annual statements of 2021 for cineworld without the obligation of recording ANY liability or booking a provision for this ongoing litigation with cineplex. The auditor is obliged to have taken external legal advice by canadian experts what to do, how to handle with this situation, whether cineworld should have or should not have recorded this in their financial statements.
- cinemacon: in two/three weeks, cinemacon, global largest cinema convention is taking place. Only god knows whether Mooky and Ellis will have discussion to come to an out of court settlement discussion?!
- appeal: we could expect any time in april an update of cineworld submitting the appeal.
- q1 was not great, but q2 will be better: q2 is likely to be the strongest quarter if 2022. Fingers crossed!
You think manuela van dessel watches this forum?!
Needless to say, this is a volatile ride and sometime hard to hold on. Anyway, I think it is fair to share how I look at things:
- Cineplex dispute: as long this exists, it will have a clear overhang and can take until end of this year if no out of court settlement takes place. Having said that, there is a high likelihood that the amount will be lowered. Cineworld is now working with an army of lawyers, including canadian law firms to appeal this unprecedented court ruling. The fact that cineplex’s share price is not reflecting a minimal amount of this number confirms not only we, but also them not believing they will see a major portion of this. The fact that cineplex did appeal themselves asking to be remunerated differently is; 1) something that is rarely seen before and 2) a confirmation they also believe that this ruling is neither feasible (as a unsecured creditor) nor sustainable.
- large debt pile: I do share my concerns of the change in increased uncertainty on the phrasing in the ‘going concern’ part of the fy21 statements if it comes to potential breach of covenants. Debt covenants are only tested if more than 65% is withdrawn from the 420m RCF. A lot will depend on the trading of the coming quarter as we all know Q1 was not great (even this was expected due to the relatively weak movie slate in jan/feb). But cineworld has some options: 1) get a covenant waiver, like they got in 2020 for 2 years, but that comes a cost, 2) repay more than 35% of the rcf which is only 150m approx and do-able next to the remaining 60m for Regal claim and min 100m liquidity covenant (certainly when q2 should generate good cash) or 3) re-finance the rcf. In terms of refinancing, cineworld is already discussing this with some parties. However, they need to get approval anyway from the lenders, so if they refinance one of the more expensive debt items it needs to be with by another debt items at one of the existing lenders.
- rising interest rates: there is a floor to margin (1%) there is a limited impact, so yes it certainly not helps because of higher interest expenses but it is not squeezing out everything.
- cineworld is preserving cash and only executes on pre-committed capex plans and is not initiating new capex initiatives at this moment, luckily
- raising equity; it is clear that cineworld will at some point need to raise equity. Having said that, looking at the recent 2 years, it should not go unnoticed they haven’t done it so far and will never, never do it at these current levels in order to avoid large equity dilution that is not applicable to us but also to mooky himself. When more positive news will follow on the back of settlement or lowered payable amount to cineplex, it is rather than the right time to raise equity.
Conclusion; it had turned out differently than I initially expected, and even it is hard time to look at the graph of cineworld shares, I believe it is right to hold on because it will improve, but we need some extra pat
Covenant test of 5x ebitda is only applicable if more than 35% of the RCF is withdrawn. So, if CINE is able to pay back 65% of the rcf no covenant test is applicable.
AMC CEO stated that in the near term more transformational deals will follow. What if he would buy CINEworld for an all shares deal?
Lmil13
What are you saying? At the time of fy21 publication, cineworld shared that March was at 86% of 2019. Please, stop sharing wrong information if you don’t know the case well enough.
No reason to panic based on the article. Nothing has changed from friday.
presentation of fy21 results on investor relations website
@Hexam
March so far was at 86% pre-Covid, with only Batman driving the box office. So indeed if current pace is sustainable that’s already sufficient I think. Having said that, we all know that the coming 3.5 months offer a secure flow of new strong movies one after the other. So should be manageable, especially when the spend per person remain so high
Batman records box office exceeding $300m domestically and $598m globally. Results of last weekend comes bit short of expectations but other movies like jujustukaisen highly outperform.
It seems that $400m domestically for batman becomes bit challenging but we can still conclude this proves to be a big success for a $200m budget movie. If global box offfice can reach the $800m for Batman it is considered as a real outperformer despite chinese cinema operators today one out of two are closed again because of covid; total box office continues to show overall strength since early march with more large budget movies coming to the big screen anytime soon
In my opinion weakness of the shares on friday were driven by comments of mgmt around increased risk for covenant breach on the rcf end of june. Key is to keep the box and retail revenues at current pace or even higher! If we are successful in doing this, this could support some relief in the shares
The court ruling with cineplex is clearly also a drag on the shares but it is obvious that the outcome of this is only to be clarified in 2023… if no other settlement occurs before
Nope; more interesting of the $92m payable to dissenting regal shareholders, $33m is already paid.
Company foresees to deleverage and refinance over 2022.
Trading box office stood at 54% in Jan, 64% in Feb… and back to 86% in March! Pre-covid. So it confirms simply that jan/feb weakness driven by covid is to be offset by relief of industry, strong movie slate and march simply confirms this is feasible!
In addition, cost saving initiatives results in 50-75 ANNUAL cost saving, which is great.
The fact that cineworld foresees to open, 8 new sites also in 2022 proves company has still some (limited) flexibility in cash!
Someone has live pricing?
Revenues comes in 4% below expectations, but profitability levels (EBITDA) exceeds consensus by 5%, implying margin comes in 250 bps higher than foreseen. As such, you can assume that structural cost savings have a huge impact, especially when trading would strengthen further. Also in terms id net income loss, expectations were much worse.
Company admits (but not a surprise) that if they need to pay cineplex C$1.23bn, they would not have sufficient liquidity. In addition, ‘it is noted that cineplex is a unsecured creditor’. —> Meaning, IF cineplex wants to see some $, they better find another deal with Cineworld.
Seems they also slightly adjusted base case scenario, where return to levels are lowered, meaning, if results are a bit lower, it is still fine to continue business as usual.
It seems that someone is getting impatient, uncomfortable into the numbers of Thursday, desperately looking for some bad news to share here on the board hahaha
C’mon giantsquid, where are your balls of steel?!
You are such a ****** blackbridge. No single comment of you was of added value until today. Whether it was on the short or long side
Well said Bonkers.