Lessons from Cineworld’s restructuring?

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According to Sky News, Cineworld’s London-listed holding company is preparing to file for administration before the month end as a part of an extensive global financial restructuring plan.

In recent years it has suffered from a potent mix of a debt fuelled acquisition, the rise in online streaming services and the COVID-19 pandemic. Cineworld filed for Chapter 11 bankruptcy protection in the US last Autumn, hoping to restructure its massive debt.

Kerri Wilson, Senior Associate, Ontier LLP   explains that it is expected the administration process in the UK will see the transfer of ownership of the company to its lenders but that operations at its 128 UK cinema chain will be unaffected.

What can other businesses learn from Cineworld’s journey?

Don’t overdo the debt

Without doubt the acquisition of US Regal Cinemas in the US in 2018, whilst ambitious, played a part in Cineworld’s fate. There was no way Cineworld could have predicted the global economic disruption which would follow with the COVID-19 pandemic 2 years later. However, there was earlier reason for concern about its financial health, including a 23% crash in share price in June 2019, given the company’s significant debt and lease liabilities.  In fact, by November 2019, Cineworld was the most shorted business in the UK meaning financial institutions were betting on Cineworld’s shares losing value.

Arguably management ignored the warning signs even proposing a further acquisition of Canada’s Cineplex Entertainment which was abandoned when the pandemic struck.

Smell the coffee

The COVID-19 pandemic significantly affected the Group’s results, with all sites across the Group closed for a period in 2020 and takings severely down thereafter. In its Annual Report and Accounts published April 2021, the Group recorded a revenue drop of 80.5% down on the previous year and an operating loss for the first time in its history. 2021 proved slightly, although not much, better with further losses yet again.

This begs the question – should Cineworld have acted sooner? Although there is no correct answer to this, restructuring a business sooner rather than later is always the best route.

Restructuring route

Even though Cineworld is under Chapter 11 protection in the US, it will need to file separately for administration in the UK. The intention behind the administration is, we understand, to facilitate the transfer of ownership of the company to its lenders via a debt for equity swap. This results in the debts/obligations of the company being exchanged for something of value and writes off money owed to creditors.

Why choose administration?

Administration can, potentially, save a business. It affords the company an opportunity to restructure or realise its assets while being protected by a statutory moratorium, preventing creditors from enforcing their claims against the company. You could say the company is placed in a safety bubble, giving an administrator breathing room to see what can be done to rescue the company or achieve the best results for the company’s creditors.

Next steps

The company’s administrator, an insolvency practitioner, takes control of the company’s business and assets from the company’s directors. The administrator is then required to achieve one of the following statutory purposes of administration, namely:

rescuing the company as a going concern;
achieving a better result for the company’s creditors as a whole than would be likely if the company were to be wound up; or
the realisation of some or all of the company’s property to make a distribution to one or more secured or preferential creditors.

Unlike liquidation, which puts an end to a company, Administration is a temporary process, hopefully ending with a much stronger company.

We saw other household name companies such as TM Lewin, Sofa Workshop, Joules, Made.com and Misguided fall into administration last year. Most have been saved in smaller form by new owners, although with a challenging economic outlook ahead it is perhaps still too soon to vouch for their long term future.

For Cineworld, the plan is that the restructured company will be taken forward by new management, with reduced indebtedness and a rights issue designed to place the company on a more sustainable financial footing.