Cinemex USA Real Estate Holdings, Inc. – Court Confirms Plan of COVID-Stricken Cinema Operator, Senior Lenders to Recover Less Than 1% of $159mn

October 29, 2020 – The Court haring the Cinemex USA Real Estate Holdings, Inc. cases issued an order confirming the Debtors' Third Amended Plan of Reorganization [Docket No. 936].

On April 26, 2020, Cinemex Holdings USA, Inc. and one affiliated Debtor (dba "CMX Cinema," "CMX” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Florida, lead case number 20-14696. At filing, the Debtors, the operator of approximately 40 cinemas and a wholly-owned subsidiary of Mexico's Grupo Cinemex, S.A. ("Cinemex"), listed estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn.

Overview of the Plan

The Third Amended Disclosure Statement [Docket No. 779] notes, “The Plan provides for a reorganization of the Debtors as a going concern, with a reduced number of theaters to focus on profitable locations.

• Holders of Secured Claims will receive, at the applicable Debtor’s option, (i) payment in full in Cash; (ii) delivery of the collateral securing any such Claim; (iii) payment of any interest required under section 506(b) of the Bankruptcy Code; (iv) reinstatement of such Claim; or (v) such other treatment rendering such Claim Unimpaired. The Debtors have few to no secured claims and anticipate distributions to this class to be negligible.
• Each Holder of Syndicated Bank Loan Claims will receive its Pro Rata share of the Syndicated Bank Loan Claims Allocation, consisting of the compromise amount of $1,000,000. For the avoidance of doubt, the Syndicated Bank Loan Claims are allowed under the Plan in the amount, as of the Petition Date, of $159,113,879.40. The compromise distribution to the Holders of Syndicated Bank Loan Claims is in full satisfaction of any claims or causes of action that any Releasing Party or the Debtors may have with respect to the Syndicated Bank Loan.
• Each Holder of a GUC Claim in Class 4 will receive (i) its Pro Rata share of the GUC Claims Trust (Net Assets consisting of approximately $5.3 million plus a variable note equal to 8% of theater-level cash flow or 'TLCF' (similar to operating cash flow) for the next three years net of amounts paid to Holders of Convenience Claims (approximately $190,000) and amounts paid to the GUC Trustee to administer the GUC Trust (approximately $350,000); provided that to the extent such GUC Claim is a Convenience Claim, such Holder will receive its Pro Rata share of the Convenience Claims Distribution. This allocation, subject to highly variable estimated totals of Claims in Class 4 and the speculative value of the TLCF Note, is projected to yield approximately 15% to Holders in this Class.
• Each Holder of a Convenience Claim (Holders of Claims that equal $15,000 or less or that elect to reduce their Claim to $15,000) will receive a Cash distribution equal to 12% of its Convenience Claim on or after the Effective Date.
• Intercompany Claims will be canceled, discharged, released and extinguished in full as of the Effective Date.
• Intercompany Interests will be reinstated as of the Effective Date for administrative purposes only, as a means to preserve the corporate structure for holding company purposes and avoid the unnecessary cost of having to reconstitute that structure. There is no distribution under the Plan on account of Intercompany Interests.
• Interests in Cinemex Holdings will be deemed canceled, discharged, released and extinguished, and there will be no distribution to Holders of Interests in Cinemex Holdings on account of such Interests.”

The following is a summary of classes, claims, voting rights and expected recoveries showing highlighted changes (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 (“Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and estimated recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and estimated recovery is 100%. 
• Class 3 (“Syndicated Bank Loan Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $159.1mn and estimated recovery is 0.6%. The Syndicated Bank Loan Claims are allowed in the full amount due and owing under the Syndicated Bank Loan Credit Agreement, which, as of the Petition Date, is $159,113,879.40. Each  Holder will receive its Pro Rata share of the Syndicated Bank Loan Claims Allocation.
• Class 4 (“GUC Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $50.0mn – $60.0mn and estimated recovery is 11.4% – 15.3%. Holders of GUC Claims will receive their Pro Rata share of approximately $5.3 million in cash plus a variable note from the Reorganized Debtors equal to 8% of theater-level cash flow or “TLCF” (similar to operating cash flow) for the next three years net of amounts paid to Allowed Convenience Claims (approximately $190,000) and amounts paid to the GUC Trustee to administer the GUC Trust (approximately $350,000).
• Class 5 (“Convenience Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $1.13mn and estimated recovery is 12%. Claimants with Convenience Claims that are $15,000 or less or that elect to reduce their Claims to $15,000 will receive 12% of such Claims in cash on the Effective Date.
• Class 6 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $61.9mn and estimated recovery is 0%.
• Class 7 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is N/A and estimated recovery is N/A.
• Class 8 (“Interests in Cinemex Holdings”) is unimpaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is $0 and estimated recovery is 0%. 

Voting Results

On November 23, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 911], which were as follows:

• Class 3 (“Syndicated Bank Loan Claims”) 13 claim holders, representing $292,180,816.72  in amount and 100% in number, accepted the Plan.
• Class 4 (“GUC Claims”) 26 claim holders, representing $29,023,214.96 (or 69.67%) in amount and 83.87% in number, accepted the Plan. 5 claim holders, representing $12,636,958.70 (or 30.33%) in amount and 83.87% in number, rejected the Plan.
• Class 5 (“Convenience Class Claims”) 31 claim holders, representing $122,547.41 in amount and 100% in number, accepted the Plan.

The GUC Claims Trust 

The Third Amended Disclosure Statement reflects the creation of “The GUC Claims Trust," under which the GUC Claims Trustee will distribute to holders of General Unsecured Claims $5.3mn in net assets, less the amount needed to make a 12% distribution to holders of an estimated $1.13mn in Convenience Claims, as well as a Theater Level Cash Flow Note (the "TLCF Note"). According to the Third Amended Disclosure Statement, under the TLCF Note, the Debtors "shall be obligated to pay eight percent (8%) of Theater Level Cash Flow for all Theaters for the period of January 1 through December 31 of each calendar year, distributed on an annual basis for a period of three years following the Effective Date (each such payment, a 'TLCF Payment').

The initial TLCF Payment shall be paid no later than June 30, 2022, and the two subsequent TLCF Payments shall be paid promptly following the completion of the Debtors’ audited financial statements (but in any event no later than five months after each year’s end even if the Debtors’ audited financial statements are not yet complete), which the Debtors anticipate will be completed in May 2023 and May 2024. For the avoidance of doubt, no interest shall accrue or be payable on account of the TLCF Note unless the Reorganized Debtors fail to make a timely TLCF Payment, in which case interest shall accrue at the rate of fifteen percent (15%) per annum with respect to any such TLCF Payment, commencing on (i) July 1, 2022, with respect to the first TLCF Payment, and (ii) June 1, 2023 and June 1, 2024, respectively, for the second and third TLCF Payments, or such earlier date as any TLCF Payment was due. If any of the Theaters are disposed, closed or contracted to be managed by another party prior to the end of the third year after Plan Confirmation, the GUC Claims Trust shall receive 8% of the projected Theater Level Cash Flow for that location through year 3 (such projection to be reasonably agreed by the GUC Claims Trustee). If any of the Theaters is transferred to an affiliate of the Debtors, that affiliate must assume the obligations under the TLCF Note with respect to any such Theater. All TLCF Payments (and the underlying calculations) shall be subject to audit, following which the TLCF Payments may be adjusted."

To account for the GUC Claims Trust, the Third Amended Plan reduces the proposed distribution to holders of Convenience Claims to 12% from 15% and beefs up a vague description of the proposed treatment of holders of General Unsecured claims in the Second Amended Plan, which references the trust and TLCF Note, but does not provide specific details of those recovery vehicles.

The Third Amended Disclosure Statement stresses that: "This allocation, subject to highly variable estimated totals of Claims in Class 4 and the speculative value of the TLCF Note, is projected to yield approximately 15% to Holders in this Class." Despite that disclaimer, the Second Amended Plan calls for an estimated recovery for holders of General Unsecured Claims ranging from 11.4% to 15.3%."

Events Leading to Chapter 11

The Debtors, an aggressive new entrant in the U.S. movie theater space, have been slammed by the coronavirus; and slammed just after committing to a major acquisition of Texas-based theaters from Star Cinemas Grill ("Star Cinemas"). Such is the impact of COVID-19 on the U.S. movie theater industry, that these very recently sanguine investors (with "robust expansion plans in the United States") have used their Chapter 11 filing as a pretext for calling on a wholesale rethink of the sector's business model (see "Press Statement," below), arguing that the sector (which may never return to pre-crisis levels) is overly generous to studios and landlords and leaves theater owners impossibly squeezed in the middle. 

Back to the more immediate matter of Star Cinemas; the fate of that acquisition indicative of just how quickly COVID-19 is turning many M&A transactions upside down. 

For these Debtors, in the course of just over a month:

(i)  They heralded their acquisition of Star Cinemas (agreed on March 10th and announced on March 13th). The Debtors' press release then stating: "The purchase reflects the on-going strategy of CMX Cinemas to establish a major footprint within the motion picture exhibition industry in the United States. The acquisition will position CMX as the seventh largest movie theatre chain in the United States with a presence in 13 states, 51 sites, and 504 screens [and] bolster CMX's robust expansion plans in the United States and comes on the heels of our recent acquisition of Cobb Theatres");

(ii) They backed out of the Star Cinema transaction (March 26th). According to the Complaint (defined below), "Cinemex’s counsel responded later that day, claiming that 'in light of COVID-19 related fallout, Cinemex will not and is not obligated to close this transaction. Among other things, Cinemex’s operations and finance teams lack pre-Closing access to Star Cinema theaters and the Corporate Employees managing those theaters. Attempting to close under these circumstances would imperil Cinemex personnel. Moreover, key personnel are located in Mexico City and cannot get to Houston regardless because the US/Mexico border is closed” [see the attached  Star Cinema complaint, and, for more on the Debtors' reliance on Trump press conferences ("No, I’m not concerned at all. No, we’ve done a great job with it”) and concerns over the health of those performing diligence at closed movie theaters, see the Debtors' motion to dismiss]; and 

(iii) They were named as a defendant in a complaint (the "Complaint," with Quinn Emanuel serving as defendant's counsel) filed by Star Cinema demanding that the Debtors be forced to complete the acquisition and lambasting the notion that the theater-closing ramifications of the pandemic could be a surprise to any of the parties (potential theater closures, Star Cinema insists, having been explicitly discussed and forming the basis for a negotiated 10% price reduction) or that it could possibly be perceived as a "material adverse event." The Complaint continues: "The Coronavirus loomed over the parties’ negotiations nearly every step of the way….Indeed, the parties were well aware of the specter of the Coronavirus in the days leading up to their execution of the Agreement and explicitly addressed the outbreak and its potential financial impact during negotiations. Cinemex received a reduction of the purchase price in recognition of that potential impact, including explicitly discussing that Star Cinema Grill could potentially shut down for months. Eventually, the parties agreed on the terms of the Transaction, and on March 10, 2020, they executed the Agreement, which provided for Cinemex’s purchase of the Companies for a total enterprise price of $ [redacted]. This amount, along with other adjustments in the Agreement, included an almost 10% discount from the parties’ initial discussions during the IOI stage. The discounted purchase price was agreed upon by the parties in consideration of the Coronavirus threat."

On April 25th, the Debtors filed a motion in respect of the Star Cinema litigation and requested an automatic stay of those proceedings in light of the Debtors' Chapter 11 filing.

Press Statement

In a statement announcing the Chapter 11 filings: The Debtors stated that the bankruptcy filing was "as a result of the economic crisis precipitated by the coronavirus pandemic."

The statement continues: "We are in a state of complete uncertainty as to when we can re-open our theaters and when our customers will feel safe and secure in returning to them given that there is presently no vaccine against the virus. We cannot forecast when — if ever — customer numbers will return to pre-crisis levels….We are not generating any revenues while having to pay high fixed costs. Even prior to filing for bankruptcy, we were spending over 30 percent of our revenues on lease-related expenses while studios ended up with 60 percent of every ticket sold.

We tried in good faith to negotiate with our creditors — who notwithstanding the crisis were seeking full payment and filing liens — to no avail….the studios, landlords and theater companies must take this as an opportunity to place the industry on a sound, long-term financial footing. To do so, there needs to be a rebalancing of the current economic arrangements, which disproportionately benefit the studios and landlords at the expense of the theater companies. The industry will not survive absent such an economic rebalancing. The studios will continue to need the revenues and publicity generated by theater companies notwithstanding digital distribution, and mall landlords will become even more reliant on movie theaters as retailers continue to migrate to the internet…A viable rebalancing would result in (1) studios getting a maximum of 40 percent of theater companies’ revenues; and (2) mall landlords providing the same terms to movie theaters that they currently provide to anchor tenants such as department stores. Movie theaters are increasingly the anchor tenants and landlords should treat them as such.

Key Documents:

The Third Amended Disclosure Statement [Docket No. 779] attached the following documents:

• Exhibit A: Plan of Reorganization 
• Exhibit B: Corporate Organization Chart 
• Exhibit C: Disclosure Statement Order 
• Exhibit D: Liquidation Analysis 
• Exhibit E: Financial Projections

The Debtors filed a Plan Supplement [Docket No. 885] which attached the following:

• Exhibit A: New Organizational Documents (such certificates or articles of incorporation, by-laws, limited liability company operating agreements, stockholders’ agreements, or other applicable formation and governance documents of each of the Reorganized Debtors, as applicable); 
• Exhibit B: Assumed Executory Contract and Unexpired Lease List 
• Exhibit C: Rejected Executory Contract and Unexpired Lease List
• Exhibit D: Stock Purchase Agreement
• Exhibit E: Schedule of Retained Causes of Action
• Exhibit F: Schedule of members of the Reorganized Cinemex Board and management for the Reorganized Debtors
• Exhibit G: Cap-Ex Escrow Agreement
• Exhibit H: GUC Claims Trust Agreement
• Exhibit I: Governance Term Sheet
• Exhibit J: List of Insurance Policies
• Exhibit K: Opt Out Form
• Exhibit L: List of Theaters
• Exhibit M: Form of TLCF Note

Prepetition Capital Structure

Liquidation Analysis (see Exhibit D of Disclosure Statement [Docket No. 779] for notes)

About the Debtors

CMX Cinemas, a wholly-owned subsidiary of Cinemex, opened its doors in April 2017 at Brickell City Centre, Miami, FL, offering new features to give guests an innovative and VIP movie-going experience. CMX provides state-of-the-art technology that can be enjoyed through different types of experiences: CMX CinéBistro, the luxury dine-in and in-seat service; CMX Market the innovative self-serve food hall movie experience and CMX Premium, the upgraded traditional theater with classic concessions. It also features the trendy and exclusive CMX Stone Sports Bar at select theaters, making CMX the one-stop destination for entertainment. CMX, with the acquisition of Star Cinema Grill, will have 51 sites [NB: take off 10 sites without the Star Cinema acquisition], 504 screens and more than 3,000 employees, in venues located in Florida, Illinois, Minnesota, Georgia, Alabama, North Carolina, Ohio, Virginia, Maryland, New York, New Jersey, Colorado and Texas. New openings are scheduled in Wrigleyville, Chicago, Illinois; American Dream, New Jersey; Coastland, Naples, Florida; and International Mall, Tampa, Florida. 

About Cinemex

Cinemex is one of the top ten cinema chains worldwide, with 351 sites in 104 cities, 3014 screens and more than 14,000 employees. Founded in 1995 with the intent to revolutionize the movie entertainment industry, Cinemex began installing multiplexes and stadium-style seating with the primary focus of attending every guest’s needs. Today Cinemex continues to offer innovating concepts in cinema-going, including Platino Cinemex and Cinemex Premium, state-of-the-art theaters equipped with luxury seating and first-class dining, Cinemex 3D, and the 4D experience. At Cinemex, our main goal is to offer the best entertainment to our guests.

Corporate Organization Chart

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