Cineworld (CINE) has warned that it could become a box-office flop because of the impact of the coronavirus outbreak. In a worst-case scenario, the cinema operator envisages losing two to three months’ worth of revenues due to site closures. There is a risk that this would lead it to breaching its lending covenants – casting “significant doubt” over its ability to continue trading. Cineworld’s shares crashed by more than 40 per cent in response.
The group said that it has not observed a material impact from Covid-19 on cinema admissions so far. There was even an increase in the number of admissions in the first two months of 2020 against the previous year. And though the release of the latest James Bond movie has been pushed back to November – largely because of the closure of cinemas in Asian markets – studios had advised Cineworld that they remained committed to their release schedules in the countries in which it operates.
Still, with unfortunate timing, it was revealed just hours later that the final instalment of the highly popular ‘Fast and Furious’ film franchise – expected to drop in May – would be delayed until next spring. Walt Disney (US:DIS) has also postponed the release of ‘Mulan’.
Significant debt
As of December 2019, Cineworld had term loans totalling $3.6bn (£2.9bn) and a revolving credit facility of $463m, which had been drawn down by $95m. The revolving credit facility is dependent on certain covenants, which are triggered above 35 per cent utilisation. The term loans also have cross default provisions pertaining to this covenant. A cross default provision allows for a borrower to be put into default, if they default on another obligation. Cineworld said that it did not expect to exceed the respective utilisation threshold.
But investor concern about the group’s debt pile is understandable. Cineworld is also funding the $2bn acquisition of leading Canadian cinema chain Cineplex – which is due to complete in the first half of this year – with a secured term loan of about $1.9bn, and a $0.3bn unsecured bridge loan.
The downside scenario projected by the group is currently deemed unlikely, but it conceded – as many organisations have – that it is “difficult to predict the overall outcome of Covid-19 at this stage”.
Shareholder sale
Just days before this announcement, Cineworld said that its largest shareholder – Global City Theatres (GCT) – had agreed to sell around 108m shares, representing close to 8 per cent of its issued share capital, as part of a debt refinancing plan.
Shares in GCT and its parent company are held in the family trusts of Cineworld chief executive and deputy chief executive Moshe Greidinger and Israel Greidinger. The proceeds of the respective share sale (£116m) will be used to change a margin loan facility provided to GCT into a new secured corporate loan facility. Cineworld noted that it welcomed this transaction, as a removal of any margin loan provisions tied to management’s shareholding.
Revenue decline
The latest update from Cineworld came within its results statement for 2019. For the period under review, the group reported a 6 per cent rise in revenues to $4.4bn. But on a pro-forma basis – as if Regal Entertainment Group, which it bought in February 2018, had been held for the entirety of the comparative period – revenues slipped by 6 per cent.
This contraction stemmed from a strong prior-year film slate, and the closure of loss-making cinemas in the US. After finance expenses including lease liability interest, and interest expense on bank loans and overdrafts, statutory pre-tax profits shrunk by 39 per cent to $212m.
“A solid year”
Even so, chairman Anthony Bloom called last year “a solid year for Cineworld; a year in which over 275m customers watched movies on our screens, adjusted EBITDA [cash profits] exceeded a billion dollars, the synergy expectations in the Regal acquisition were virtually doubled in a well handled integration exercise, net debt was reduced and the dividend increased”. There is no doubt that management is justified in highlighting recent operational progress, but we live in interesting times, and Mr Bloom acknowledged that events could “develop adversely very quickly” – but he remains confident that “the crisis will ultimately pass”.
However, there were questions about the future viability of the cinema industry before the coronavirus took hold. Across the globe, consumers have increasingly opted to sign up to subscription-video-on-demand (SVoD) services – streaming television shows and films in the comfort of their own homes. If anything, the virus could help to expand the viewership of the likes of Netflix (US:NFLX), Apple TV+ (US:AAPL) and the Disney+ streaming platform. The cinemas that emerge unscathed from coronavirus may well find that they have lost customers to the small screen.
