Lex column tonight19 Nov 2020 20:02
James Bond comes out of the unlikeliest of situations on top. Cinema chain Cineworld will need some of the screen spy’s luck to escape its own knife-edge predicament. Implementing a company voluntary arrangement, a UK-style accommodation with creditors, would buy it some time. But Cineworld’s capital structure, like the womanising, boozing Bond of old, is a relic of a bygone age.
If Cineworld pursues a CVA, it would be a significant moment. The cinema chain would become one of the UK’s first large, previously viable businesses to send this signal of extreme financial distress because of the pandemic. Any future lockdowns mean Cineworld would not be the last to do so.
The qualification is that the group had been pursuing a risky growth strategy under brothers Mooky and Israel Greidinger. Debts soared as the group acquired US chain Regal for $3.6bn in 2018. Covenants on more than $4bn of bank loans are expected to be breached in December. Vaccines offer hope of a speedier return to normality. But audiences will remain small for months to come.
Cineworld has enough liquidity to hobble into next year. Reserves were about $250m at the end of September, think S&P credit analysts. A burn rate of $50m per month during initial lockdowns may be pushed lower via CVA savings.
A more immediate problem is a lack of new films. Big releases such as the new James Bond film have been pushed back. A vicious cycle has emerged where studios are unwilling to invest, keeping cinemas shut when they might otherwise reopen.
Movie studios are also renegotiating “theatrical windows” to take advantage of streaming demand. Universal has already slashed this period of exclusivity on new releases to just 17 days for cinema chain AMC.
Shareholders will probably be called on to get Cineworld in line with the new realities. Further borrowing would only compound the problems. A current equity value of just over £600m ($815m) means a rights issue is still possible. The size required is likely to leave shareholders both shaken and stirred.
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