The group’s plan compromises its landlords and creditors to varying degrees, with Otium, M&G, AEG Worldwide, BNY Mellon, St James Place UK, and councils across the UK being the most compromised. Cineworld’s landlords have not yet coalesced or appointed advisors, according to two sources familiar with the situation.

Cineworld suggests its proposals are the only way to avoid an administration and accelerated sale of the UK group’s assets, as its US group has become unwilling to provide further financing absent a balance sheet restructuring. We examine what those proposals mean for lenders, as well as Cineworld’s suggested Relevant Alternative.

9fin approached Cineworld for comment but did not receive an immediate response.

The premature sequel

This is not the broader group’s first dalliance with a restructuring process, though. In 2022, Cineworld filed for Chapter 11 protection, resulting in (among other things) a $4.53bn debt reduction, an equity capital raise and new term loan and a revolving credit facilities. It exited Chapter 11 in July 2023. The broader group consists of a US group, the UK group and some companies operating in the ‘rest of the world’.

The plan companies, Cine-UK Limited, Cineworld Cinemas Limited, Cineworld Properties Limited and Cineworld Estates Limited are part of the ‘UK group’ and are (i) borrowers under several intercompany loans, (ii) primary obligors under a ~$1.6bn term loan due 2028, and (iii) tenants under lease agreements.

The UK group had historically been profitable — generating £80m EBITDA in FY19 — up until the Covid-19 pandemic. During and after Covid-19, it made losses, with negative EBITDA of £25m in FY20, £6m in FY21, £8m in FY22, and £10m in FY23, according to the documents.

And then came the writers’ and actors’ strikes… The result? More funding needed by the UK group (and helpfully provided, unsecured, by the US group) to see it through to March 2024!

Alas, that was not the end of the sorry saga. Shortly thereafter, in June 2024, the UK group faced a £15.9m quarterly rent payment. The US group offered to finance this if it was secured against the UK group’s assets on a first ranking priority basis. This was documented under a $19m intercompany loan — due 1 October 2024 — designed to bridge to completion of the broader restructuring. We’ll call this the new intercompany loan.

Cineworld has clearly been in planning mode for some time. In April 2024 it appointed Alix Partners as its financial advisor and CBRE as commercial property advisor.

• CBRE analysed Cineworld’s lease sites and established their estimated rental values (ERV). The upshot? Cineworld is paying too much for a number of its sites. CBRE proposed market rent figures for the relevant sites
• Alix Partners began a marketing process for the UK group, which failed to generate any bids for the whole UK group.

Cineworld concluded a sale was not a viable option — so the directors decided they needed to turn the ship around. A turnaround plan was put together to (among other things):

• Reduce some rents and exit sites
• Unlock (i) a further £35m for capex and (ii) a further £16m of funding from the US group to cover liquidity

Forbearances and waivers are in place from a steering committee of over half (by value) of the term loan lenders to create a platform to deliver the Restructuring Plans. The steerco group is represented by Simpson Thacher & Bartlett. The RCF lenders have also agreed to forbearances and waivers — they are advised by King & Spalding.

Kirkland & Ellis continues its role as the group’s legal advisor from Cineworld’s US restructuring.

But what debt?

So what debt will be compromised? The plans primarily relate to about 60 of the UK group’s lease obligations. But, as noted, various other debt obligations will be effected too —

• ~$1.7bn term loan liabilities
• £80m of various intercompany loans (including the new intercompany loan)

We’ll talk about the proposed approach to these shortly. But first, lease liabilities.

Off the back of the CBRE analysis, the directors have decided to split the UK group’s lease liabilities into different classes, based on the economic viability of each site. In broad brushstroke terms, they have been categorised as follows, from best (Class A) to worst (Class D3). We’ve also set out the proposed treatment.

Landlord creditors do not benefit from any security over Cineworld’s UK assets, but will retain their proprietary rights, which cannot be compromised under a restructuring process. This means that, subject to specified periods, both the plan companies and their landlords may exit the lease agreements.

And how about the UK group’s other liabilities? The plans:

• Also compromise some business rates liabilities, claims against plan companies as lease guarantors, as well as assorted ‘general property liabilities’ (e.g. dilapidations claims, etc)
• Do not compromise existing shareholders, the group’s $250m revolving credit facility, or the Class A leases

And what about if the plans don’t happen? What’s the ‘Relevant Alternative’?

As ever, the Relevant Alternative is crucial. See our Under the hood on the concept for further details. It goes to class composition and the ability to cram-down classes.

The view is that the Relevant Alternative is either a pre-pack administration (where key assets would be sold to the US group or the term loan lenders) or trading administration (where the US group would need to provide further funding, ultimately leading to an accelerated sale process of the UK assets).

One can imagine a scenario in which dissenting landlords challenge the formation of the Relevant Alternative. Why would it be an insolvency process in circumstances where the group/shareholders remain happy to continue stumping up cash — that’s to say, fund a trading administration? Inbound challenges on the valuations CBRE prepares are also possible.

This all leads to the question…

Who’s in what class, and how will they be treated?

There are 15 classes! Why so many? Well, it’s mainly because of all the different classes of lease liabilities — we set these out above (although remember there are also guarantor classes for each ‘landlord’ class too — hence the large number). Because of the different ‘viability’ they are being treated pretty differently under the plans. And so, they sit in separate classes. Their rights diverge too, materially. We’ve described their treatment in the table above.

Then you’ve got the new intercompany lender (remember that’s effectively to fund the June rental payment and acts as a bridge). That sits separately and is then released and equitised in full upon completion. Term loan lenders are also in a separate class — the proposals only extend the PIK interest period and maturity by six months to 31 July 2025 and 31 January 2029, respectively (as well as the soft call period).

Each class not ‘kept whole’ (i.e. not compromised) will receive a compromise payment linked to what they would receive in the Relevant Alternative (we told you it was an important concept). The figure seems quite arbitrary — here it’s 150%. This can all be traced back to a few restructuring plans earlier this year, stemming from the famous Adler judgment, leading to the outcome in Aggregate.

Basically, a restructuring plan needs to be a ‘compromise or arrangement’. You can’t just expropriate rights. There needs to be some payment or consideration. It also helps to evidence satisfaction of the ‘no worse off test’ — i.e. that a dissenting class has been treated better than they would be in the Relevant Alternative (there it is again).

Cineworld’s proposals not only compromise future rent payments, they also compromise rent arrears for class C2 landlords and onwards.

Finally, will it be ready for Oscar season?

We don’t have much detail on the timeline. But, so far, Cineworld expects to hold a convening hearing for its restructuring plan on 27 August 2024, followed by a sanction hearing on 26 September 2024.

Looking for more distressed content? Then make sure you check out our latest deep dive on Thames Water.