On Friday, Canada’s largest chain of movie theatres brought $250mm of 5y bonds to market with a coupon of 7.5%. This financing should provide a bridge until theatre re-openings, offering Cineplex 12-18 months of operating liquidity.
The Backstory.
After suffering declining attendance for several years, in December 2019, Cineplex shareholders were offered some salvation when British Cineworld Group offered to buy the company at $34 per share.
The Pandemic skewered the deal, with Cineworld abandoning the bid on June 12th, 2020. The ensuing lawsuits and counter-suits are still on-going
To survive the lockdowns, Cineplex has drastically cut costs, pursued rent abatements, sale-and-leasebacks, obtained federal wage subsidies, etc.
The New Release.
$250mm 5y unrated second lien bonds with a coupon of 7.5%. For context, the average high-yield bond offers around 3.5% and CCC bonds 6.5%.
The deal was 5x oversubscribed with 50 buyers. It was launched at $100 on Friday afternoon and is currently trading at $102.50.
Although the bond is unrated, there are some key covenants in place. There are restrictions on dividends and share buybacks, and specific leverage targets for Q4 2021 and Q3 2022.
The bonds are callable in February 2023 at $103.75
With this injection of liquidity, the stock has rallied over 15% since Friday morning
The Bond Buyer’s Beliefs.
The bondholder’s thesis is a two-part story: i) the liquidity gets Cineplex through the period of theater closures and ii) patrons eventually return to theatres.
The bonds buy them 12-18 months, at which time one hopes some level of theatre re-openings are possible. Furthermore, management is incentivized to meet the deleveraging targets, call the bonds in 2 years, and obtain cheaper financing.
The backlog of Hollywood Blockbusters to be released should help get butts back in seats. The Aussies have returned to the box-office with sales for the new Wonder Woman 1984 in line with the original.
Theatres will continue to be challenged, but people have also been predicting their end since the advent of the black and white TV.
Critic’s Choice.
The storyline and coupon for these bonds are compelling, but the unpredictable part of the plot is when and to what degree people return to the theatres. As such, the bonds remain a risky proposition, and we have therefore sized our positions accordingly.
