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Cineworld must dig deep to survive closures, avoid bankruptcy – analysts

Regal cinemas owner Cineworld Group PLC may require up to $500 million in additional liquidity to survive its latest round of closures and avoid bankruptcy, according to analysts.

The world's second largest movie theater chain behind AMC Entertainment Holdings Inc. shut venues in its core U.S. and U.K. markets on Oct. 8. The decision affects 668 sites, including 546 Regal sites in the U.S., that together account for 88% of the exhibitor's global footprint. Cineworld's share price halved on the news.

Cineworld anticipated fewer widespread closures when in September it warned investors that it would need to raise more money and could breach the lending agreements on its loans. At the time, it said it needed another $200 million to $300 million to see it through the start of next year.

But its current situation is "more extreme," according to Citigroup analyst Natasha Brilliant. As cases of the coronavirus grew once more, several big-budget releases were postponed — including the much-anticipated "James Bond: No Time to Die."

"They did not factor in the entire portfolio of cinemas being closed," Brilliant, who regularly speaks to Cineworld investors, said. "The consensus is that they require more than $300 million, but a few people have mentioned more like $500 million." Cineworld declined to comment.

The exact amount of cash required is difficult to calculate due to uncertainty around when the pandemic will end and how quickly the film slate and attendance may recover, analysts said. Cineworld needs to raise enough funding to last it longer than two to three months though, Tajesh Tailor, senior director, EMEA TMT corporate finance at Fitch Ratings, said.

When S&P Global Ratings recently downgraded the firm's credit rating to CCC-, it estimated Cineworld had $200 million to $250 million in liquidity. According to Tailor, Cineworld's existing liquidity levels are "likely to be sufficient until December," assuming it manages to reduce its costs compared to the first half of the year when its monthly cash burn was $40 million to $50 million. Costs could be about $70 million in December, when the next quarterly interest payment is due, Jefferies analysts said in a note Oct. 6.

Cineworld's net debt totaled $8.19 billion as of June 30. The company secured $250 million in a private placement earlier this year at an interest rate of 11%. The Group's financing arrangements include $3.6 billion in term loans and a revolving credit facility of $573.3 million, the covenant of which is triggered above 35% utilization, and is subject to testing twice a year at June 30 and Dec. 31. Lenders waived the first of those tests. It also has terms related to net debt ratios.

In September, management said it was considering a range of funding options including extending the tenure of its $110.8 million revolving credit facility, negotiating covenant waivers for its existing debt, getting an additional term loan, and a potential equity or semi-equity raise. It requires a combination of these options to boost liquidity, Gunjan Dixit, a vice president and lead analyst for Cineworld at Moody's, said.

Accessing debt markets and raising equity could prove both challenging and expensive due to the lack of visibility around Cineworld's operating conditions, according to analysts.

Lenders looking at the firm's credit risk profile are likely to take into account the uncertainty around cinema attendance levels and a coronavirus vaccine, Tailor said. "If there was that certainty, they would have no problem getting debt financing as they have a cash generative business under normal circumstances, though it might still be expensive," Tailor said. An increase in leverage would have a long-term impact on free cash flow and shareholder remuneration. Cineworld could be forced to continue to withhold its dividend payouts and slow the pace of capex on site refurbishments, Tailor said.

A potential lifeline could come in the form of a one-off tax cash receipt worth $200 million Cineworld is expected to receive in the second quarter of 2021 under the Coronavirus Aid, Relief, and Economic Security Act, Tailor noted. "If they can bring that forward that would help a lot with liquidity and may lead to the possibility of securing additional funding," he said.

Lengthy closures as a result of the pandemic could make it harder for the exhibitor to arrange sufficient liquidity funding through additional debt alone, Tailor said. In this scenario, Cineworld may need to consider an equity issuance or partial asset sales, he said. Existing shareholders may agree to an equity raise, Brilliant said, but the firm would need to offer a discount given where its share price is. "Appetite for a plain equity raise is low" she added.

The exhibitor could face bankruptcy if the virus continues to hamper movie-going for a sustained period of time. "A few [shareholders] mentioned that [Cineworld] could file for bankruptcy in order to get a restructuring in place," Brilliant said. "It is not outside the realms of possibility, but probably more of a last resort at this stage."

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