March 13, 2023 – The Debtors filed a motion to extend (for a second time) the periods during which they have an exclusive right to file a Chapter 11 Plan and solicit acceptances thereof, through and including June 5, 2023 and August 4, 2023, respectively [Docket No. 1405]. Absent the requested relief, the Plan filing and solicitation periods are scheduled to expire on April 5, 2023 and June 5, 2023, respectively.
In requesting further extra time, the Debtors, provided an update on their February 8th announcement that heralded an agreement with key stakeholders as to a restucturing path, albeit with negotiations aimed toward finalizing a deal still ongoing. Five weeks later (and having provided the Court with a disappointing update as to their sales efforts in the intervening period), the Debtors have "nearly reached an agreement with the Ad Hoc Lender Group and their advisors to refinance the debtor-in-possession financing facility through a restructuring support agreement" and "remain focused on developing a go-forward business plan and coalescing consensus across their capital structure for a value-maximizing chapter 11 plan."
What is in that "nearly" there RSA remains a mystery, with details possibly not forthcoming until the Debtors file their Disclosure Statement.
The Debtors are now aiming for an April 20th Disclosure Statement hearing and a May 30th Plan confirmation hearing.
On September 7, 2022, Cineworld Group plc and 104 affiliated Debtors (“Cineworld” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $10.0bn and $50.0bn. At filing, the Debtors, cinema operators, noted as to their need to seek bankruptcy shelter: “The COVID-19 pandemic changed everything… As government-mandated shutdowns led to mass theater closures in early 2020, the industry’s revenue source was abruptly cut off… Though 2021 brought a rebound to $21.3 billion, box office sales remained 50% below their pre-pandemic highs, which is insufficient to earn a profit in light of the high fixed costs associated with theater operations.”
On October 31st, the Court hearing the Cineworld Group issued a final order authorizing the Debtors to: (i) access the $150.0mn balance of what are in total $664.0mn of new money, debtor-in-possession (“DIP”) working capital term loans (the “Working Capital DIP Commitments”) and (ii) access $1.0bn placed in escrow by the Court’s September 8th interim DIP order and allow the Debtors to use those funds to repay “in full the outstanding principal amount of the Prepetition Priming Loans.” The September 8th interim order had allowed the Debtors to access $514.0mn of the new money Working Capital DIP Commitments and (ii) access $271.0mn to be used to repay the entirety of the Debtors’ foreign, non-Debtor borrowings (the “RoW Loan Transaction”).
At a January 4, 2023 status hearing, the Debtors' counsel commented on the Debtors' recent decision to pivot towards an asset sale and a renewed sense of urgency: "The most important takeaway here and the reason why we thought a status conference was so important today is that the Debtors are starting a marketing process to ensure a swift exit from Chapter 11…. at first to be candid this is something the company resisted but at this point it has become critical and vital to these cases…this process of marketing is going to provide the company with [plans for other options?] or sale options to a third party…we no longer intend to wait on anybody and diligence and everything else will need to move forward."
At that status hearing, the Debtors provided the following aspirational timetable (clearly not met) as to the now floundering sale process and filing of Plan and Disclosure Statement:
On February 8th, Debtors’ counsel told the Court in a status conference that the Debtors and their creditors had reached an agreement on the terms of a Plan of Reorganization, although negotiations aimed toward finalizing a deal were ongoing.
On February 21st, Debtors' counsel further updated the Court the Debtors provided as to disappointing sales efforts, noting that although there had been "some strategic interest in the whole business" none of the bids from prospective buyers represented all-cash offers and "no bid came anywhere near to the $6 billion of securities that exists on the company’s balance sheet today.”
As reported by Reuters, on February 24th, Cineworld stated that "its shareholders may see the value of their equity wiped out as it looks to exit from Chapter 11 bankruptcy protection after it failed to find a buyer for the whole of the world's second biggest cinema chain….It said it had received initial proposals from a number of counterparties but none offered an all-cash bid for the entire company….'In light of the level of existing debt that is expected to be released under any (reorganisation) plan, the Company does not believe that there will be sufficient creditor support for a Plan that contemplates any recovery for equity interests,' it said in a statement."
The Extension Motion
The motion [Docket No. 1405] provides, “Since entry of the First Exclusivity Order, the Debtors have made a great deal of progress towards an agreement with the Ad Hoc Lender Group on a restructuring support agreement that will include, among other things, a plan term sheet that will enable the company to exit from bankruptcy. Notwithstanding the substantial progress made to date, the Debtors remain focused on developing a go-forward business plan and coalescing consensus across their capital structure for a value-maximizing chapter 11 plan. The Debtors seek an extension of the Exclusivity Periods to protect the progress made to date and to ensure that the Debtors stay on track to emerge from chapter 11 on a timeline that is in the best interests of the Debtors’ estates, without the risk of delay, disruption, and additional costs that could follow an expiration of the Exclusivity Periods.
Among other achievements, the Debtors have (i) obtained final approval of a $1.935 billion debtor-in-possession financing facility as well as the authority to sell certain non-essential real property and (ii) nearly reached an agreement with the Ad Hoc Lender Group and their advisors to refinance the debtor-in-possession financing facility through a restructuring support agreement. The Debtors have also addressed other matters related to these chapter 11 cases, including obtaining first-day and second-day relief to stabilize operations and ensure a smooth landing in chapter 11, filing schedules of assets and liabilities and statements of financial affairs, establishing claims bar dates, retaining section 327 and ordinary course professionals, establishing interim compensation procedures, and rejecting or moving to reject unnecessary or burdensome unexpired leases.”
Goals of the Chapter 11 Filings
According to the Greidinger Declaration (defined below), "As of the Petition Date, the Debtors are continuing to negotiate with the Ad Hoc Term Loan Group regarding the terms of a comprehensive, value-maximizing restructuring transaction, and will seek to build consensus with key stakeholders across their capital structure."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Greidinger Declaration”), Israel Greidinger, the Debtors’ deputy chief executive officer, detailed the events leading to Cineworld’s Chapter 11 filing. The Greidinger Declaration provides: “Before the COVID-19 pandemic, Cineworld’s business was performing well and growing. The Group had experienced record-breaking revenues in 2018 and 2019. Following the Regal acquisition, the Group was realizing even greater than expected synergies as the global organization became fully integrated. The future looked brighter than ever.
The COVID-19 pandemic changed everything… As government-mandated shutdowns led to mass theater closures in early 2020, the industry’s revenue source was abruptly cut off… Though 2021 brought a rebound to $21.3 billion, box office sales remained 50% below their pre-pandemic highs, which is insufficient to earn a profit in light of the high fixed costs associated with theater operations.
Although so many industries were affected by the pandemic, cinemas were hit particularly hard. Cinemas are highly capital intensive, requiring large spaces in desirable locations, technology upgrades to offer customers an attractive experience and expensive deals with studios for the right to show their films and other industry counterparts. To fund these expenses and many others, many cinema companies turned to the debt markets. When the pandemic eliminated their revenue, however, a number of these companies were unable to repay their obligations. Unsurprisingly, a wave of bankruptcy filings swept the industry, and companies that avoided bankruptcy found themselves in dire straits….
Cineworld’s performance tracked that of the industry. The Group’s $1.03 billion adjusted EBITDA and $293 million adjusted profit after tax in 2019 dropped to a $313.7 million adjusted EBITDA loss (after lease payments) and $913.2 million adjusted loss after tax in 2020. Though there was a recovery in 2021, performance remained significantly below 2019 levels. Virtually every key financial metric tells the same story. Perhaps most telling is the stock price. After closing at 197.95 GBX on December 3, 2019, the stock price had fallen to 38.76 GBX exactly four months later on April 3, 2020, erasing 80.4% in shareholder value….
But my brother and I, with the assistance of our management team and advisors and guided by Cineworld’s experienced Board, remained steadfast in our goal of maximizing value and adapting to the circumstances we faced. Cineworld took difficult measures to stem its losses and enhance liquidity. As noted, the Group implemented numerous cost-savings initiatives and obtained over $800 million in rescue financing to maintain viability while hoping to outlast the pandemic. But these measures were premised on an ultimate bounce back to pre-pandemic performance levels, which, as discussed below, remains an uphill battle to this day."
Massive Delays in Film Release and Production Schedules Cause Immediate Losses and Multi-Year Ripple Effect
The Greidinger Declaration continues, "While the initial market downturn can be attributed directly to mass cinema closures in early 2020, the industry’s troubles did not cease when cinemas reopened their doors later that year. Instead, these difficulties were exacerbated when studios chose to withhold their blockbusters from theatrical release in an effort to preserve potential revenue by waiting until government restrictions were lifted and audiences returned to theaters. Moreover, even if studios wanted to release content earlier, pandemic restrictions also affected production sets, resulting in a content backlog that continues to plague the industry today. Unfortunately, two months became two years, and the dearth of inventory was sorely felt by cinemas everywhere (and continue to cause extraordinary challenges in the industry)….
Cineworld closed its U.S. and U.K. theaters indefinitely, determining that projected revenues could not keep up with expenses due to the lack of hit films… Though there has been a gradual recovery of consumer demand following the doldrums of 2020, to this day the industry is suffering the effects of the massive disruption caused by the pandemic. Most critically, film release and production schedules continue to lag well behind 2019 levels. As recently reported, the number of films released on more than 2,000 screens remains down over 30% from 2019, which can be attributed in large part to an industry backlog at each stage of the production process. This delayed release schedule has continued to plague the Group this summer and is expected to continue into 2023. This has been a major contributor to the Group’s current liquidity crisis and has prevented much-needed revenues that could be used to repay debt and other deferred obligations.
The Pandemic Catalyzes the Already-Growing Influence of Streaming, Diverting Essential Cinema Revenue
During the early stages of the pandemic, millions of people worldwide stayed at home. In the absence of cinemas, other mediums stepped in to fill the void, and the direct to home entertainment phenomenon was born. Though they could never replicate the true cinematic experience, large corporations like Amazon, Apple, Disney, Paramount and others saw the potential in home entertainment alternatives during the pandemic and either launched their own new streaming service or invested heavily in their existing services. These new players in the home entertainment area were able to offer studios lucrative deals to release their films directly on their streaming platforms for at-home viewing, either skipping the cinema entirely or significantly shortening the cinema exclusivity window.
Once unheard of in a world of lucrative cinema exclusivity contracts for feature film releases, the new model soon became commonplace during the pandemic. This new model utilized a variety of forms, including (a) releases exclusively on streaming platforms, (b) concurrent theatrical and streaming platform releases and (c) releases on streaming platforms following a short exclusive theatrical release.
Although varying in impact on cinemas, one constant remained — the less time feature films spent exclusively in theaters, the more revenue was diverted from their top lines. For companies desperate for a return to pre-pandemic performance to bolster their liquidity and pay down their growing obligations, the trend was particularly devastating… Perhaps most tellingly, in 2021, the combined market bounced back to $99.7 billion, eclipsing 2019 highs, but the theatrical portion of the market remained depressed at only $21.3 billion, just over 21% of the market. When the dust had settled, although the total pie had actually grown, the theatrical slice had been halved, swallowed up by digital media alternatives—not just movies, but the enormous variety of streaming content that is now available to consumers.
Additional Business Headwinds Compound Cineworld’s Challenges During Its Most Vulnerable Period
Shareholder Appraisal Litigation Stemming from the Regal Acquisition Results in Judgment Against Cineworld. In 2018, Cineworld acquired Regal, which was publicly traded at the time. Cineworld agreed to pay Regal shareholders $23.00 per share. Over 90% of Regal shareholders approved the transaction, but certain dissenting shareholders (the 'Dissenting Shareholders') brought an appraisal action in the Delaware Court of Chancery (the 'Delaware Court') claiming that the fair value of Regal was $33.83 per share. Cineworld argued that the fair price was $18.02 per share (deal value of $23 minus synergies, which Cineworld valued at $4.98 per share).
The Delaware Court agreed with Cineworld that the fair price should be calculated based on deal price minus synergies, but nevertheless determined that the merger consideration was too low because of congressional corporate tax reforms that occurred between signing and closing of the transaction. The Delaware Court held that the fair value at the time of signing was $23.60 per share based on the deal price of $23.00 minus $3.77 of synergies per share that the Court credited after an analysis of the proffered synergies plus $4.37 per share resulting from the corporate tax reforms. The synergies that the Delaware Court credited included certain operational synergies resulting from increased volume of online ticket sales and the expansion of reserved seating to drive higher concession revenue as well as certain tax-related synergies.
A judgement was entered against Cineworld on May 13, 2021, requiring Cineworld to pay the deal price plus $0.60 per share plus statutory interest to the Dissenting Shareholders. Following entry of the judgment, in light of the Group’s ongoing liquidity challenges that rendered immediate payment in full unfeasible, Cineworld engaged in good-faith, arm’s length negotiations with the Dissenting Shareholders regarding the terms of a potential settlement agreement.
On September 10, 2021, the Group announced that it reached a deal with the Dissenting Shareholders (the 'Regal Settlement Agreement') pursuant to which Cineworld agreed to pay $170 million of the judgment to the Dissenting Shareholders up front with another $92 million placed into an escrow to be available to Cineworld as additional liquidity under certain circumstances, and otherwise to be paid to the Dissenting Shareholders no later than March 31, 2022.
In February 2022, Cineworld engaged in further discussions with the Dissenting Shareholders to reschedule the $92 million payment obligations. A deal was reached on February 2, 2022, pursuant to which the Group agreed that the remaining obligations would be paid to the Dissenting Shareholders in installments, with a final payment due on June 30, 2022 — a three-month extension from the original March deadline. In conjunction with that deal, the Group drew on the escrowed funds in accordance with the terms and conditions of the Regal Settlement Agreement and financed its remaining obligations under the Regal Settlement Agreement through the Settlement Facility.
Litigation with Cineplex Over the Terminated Arrangement Agreement Results in a Judgment for Cineplex, which is Pending on Appeal
In December 2019, Cineworld and Cineplex, a leading Canadian cinema chain, entered into an Arrangement Agreement pursuant to which Cineworld agreed to acquire Cineplex in exchange for $2.8 billion. The parties agreed that the deal would close before June 30, 2020. On June 5, 2020, however, Cineworld sent Cineplex a notice asserting that Cineplex had defaulted on the Arrangement Agreement because it breached a number of the covenants therein, including by failing to operate in the ordinary course. After Cineplex denied the alleged breaches, Cineworld sent Cineplex a notice terminating the Arrangement Agreement (and withdrew its regulatory approval application) on June 12, 2020.
In litigation, Cineplex claimed the termination was a repudiation of the Arrangement Agreement and argued that it was entitled to damages for Cineworld’s purportedly unjustified action. Cineworld denied Cineplex’s claims and asserted that Cineplex violated the deal because it operated outside the ordinary course of its business by deferring certain payments and reducing capital expenditures during the pandemic.
The Ontario Supreme Court of Justice (Commercial List) (the 'Canadian Court'), after 20 days of hearings, found in favor of Cineplex. The Canadian Court awarded expectation damages in the amount of CAD $1.24 billion and transaction costs of CAD $5.5 million to Cineplex. Cineworld vigorously disagrees with both the Canadian Court’s judgment and method of calculation of damages. Cineworld has appealed the judgment, with oral argument currently scheduled for October 2022.
While no payment has been required or made by Cineworld to Cineplex based on the pendency of the appeal, the Canadian Court’s judgment has already had a significant negative impact on the Group. Among other things, current and prospective financing sources have cited the judgment in refusing to provide the Group with additional liquidity or flexibility, and Cineworld’s stock price has been impacted and depressed by the overhang caused by the judgment and ongoing appeal."
Enhanced Corporate Governance
Again from the Greidinger Declaration, "In connection with its contingency planning efforts and in consultation with its advisors, Cineworld reviewed its existing corporate governance infrastructure. The Group determined that it was advisable and in the best interests of the Group and its stakeholders to appoint three experienced independent and disinterested directors—Gary Begeman, John Dionne and Michael Leffell (collectively, the 'Independent Directors')—as independent directors or managers, as applicable, to the boards of directors or managers, as applicable, of Crown Finance US and 68 of its direct and indirect subsidiaries that have commenced chapter 11 cases (each such entity, a 'Designated Subsidiary,' and each board thereof, a 'Subsidiary Board'). The Independent Directors retained Willkie Farr & Gallagher LLP as independent counsel.
On August 31, 2022, each Subsidiary Board established a special committee (each, a 'Special Committee') comprised of the Independent Directors that is vested with the authority to, among other things:
- investigate, prosecute, negotiate, review, settle, and approve any claims held by or against the Subsidiary Boards, on the one hand, and certain related parties (collectively, the 'Related Parties') on the other hand (the 'Related Party Claims');
- discuss, consider, and review any financing transactions and/or other strategic alternatives for the Designated Subsidiaries and their stakeholders, including the possibilities of undertaking a restructuring, reorganization and/or other recapitalization transaction (each, a 'Restructuring Transaction');
- act and bind each Subsidiary Board in connection with any investigation into each Designated Subsidiary’s past or current cash flow, liquidity, general financial condition and related financing;
- request documentation and information regarding each Designated Subsidiary’s business, assets, properties, liabilities and business dealings;
- release or settle potential claims or causes of action of each Designated Subsidiary, if any, against any Related Parties; and
- regularly and timely update the boards of directors or managers, as applicable, of the Designated Subsidiaries regarding any investigations, analyses and decisions made with regard to any Related Party Claims."
As of the Petition Date, Cineworld had approximately $5.35 billion in total funded debt obligations, approximately $5 billion of which is held by Debtor entities. The following table depicts the Debtors’ prepetition capital structure:
About the Debtors
According to the Debtors: “Cineworld Group plc was founded in 1995 and is now one of the leading cinema groups in Europe. Originally a private company, it re-registered as a public company in May 2006 and listed on the London Stock Exchange in May 2007. Currently, Cineworld Group plc is the only quoted UK cinema business. Cineworld's acquisition of Regal Entertainment Group has created the second largest cinema business in the world (by number of screens). Cineworld currently operates in the UK, Ireland, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania, Israel and the US."
Corporate Structure Chart
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