Cinemark Holdings Inc.
New Coverage: Cinemark Attempts to Shore Up Liquidity With $800M in New Debt, Revolver Borrowings as Monthly Cash Burn Could Exceed $50M
Thu 10/15/2020 07:00 AM
Relevant Documents:
2019 10-K
June 30 10-Q
Second Quarter Transcript
Movie theater owner and operator Cinemark Holdings has raised approximately $800 million in new debt and revolver borrowings in 2020 following closures of all of its theaters in the United States and Latin America due to the Covid-19 pandemic. During periods of theater closures and following partial reopenings that kicked off July 24, Cinemark’s cash burn has averaged approximately $50 million per month. Coinciding with the reopening of U.S. theaters in August, Cinemark sold $460 million of convertible notes to increase liquidity to $932 million based on the July 31 reported cash balance and taking into account the net amount raised from the convertible offering. The convertible offering follows a new $250 million issuance of 8.75% secured notes, completed in April.
Continue reading for the Americas Core Credit by Reorg team's initial coverage of Cinemark Holdings, and request a trial to access our coverage of thousands of other distressed and performing credits.
Following delays in new movie releases and uncertainty regarding attendance at open theaters, the new convertible notes have traded down below par:
The company’s other debt, including its term loan, also is indicated below par. Cinemark’s capital structure as adjusted for the recent convertible offering is shown below:
Background and Financial Information
As of June 30, Cinemark operated 534 theaters in the United States and Latin America, with 332 of those in the U.S. In addition to the United States, the company has theaters in Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, and Peru. Within the U.S., 87 theaters are in Texas and 66 in California.
The majority of the company’s revenue is derived from the sale of movie tickets and concessions. Film rental costs are variable and fluctuate with admissions revenue. As a percentage of revenue, film rental costs are generally higher for periods in which more blockbuster films are released.
A breakout of historical financials is below. Prior to the Covid-19 pandemic, in fiscal 2019, Cinemark generated nearly $700 million in Reorg-calculated EBITDA, which excludes equity income, and generated almost $300 million in free cash flow. In the second quarter of this year, with the company’s theaters closed, Cinemark’s revenue fell to $9 million and EBITDA to negative $125 million.
In 2019, Cinemark generated $2.58 billion of revenue in the United States and $702 million internationally. Film rental costs in 2019 were 57% of revenue in the United States and 49% of international revenue. Within the United States, rental costs as a percent of revenue increased from 46% in 2018. The company attributed the increase primarily to a higher concentration of blockbuster films during 2019 compared with 2018 and increased promotional expenses.
Cinemark reported $615.2 million of EBITDA and spent $230.6 million on capital expenditures in the United States in 2019. The company reported $129.9 million of EBITDA and spent $73.1 million on capital expenditures internationally in 2019.
Joint Ventures and Equity Investments
Cinemark owns 40.9 million shares of National CineMedia, which provides advertising to Cinemark’s theaters through its branded “Noovie” pre-show entertainment program. Cinemark receives a monthly theater access fee for participation in the NCM network and also earns screen rental revenue on a per-patron basis or revenue-share basis depending on the placement of the advertisement.
Cinemark also owns a 24.3% economic interest in Digital Cinema Implementation Partners, a joint venture with AMC and Regal, “to facilitate the implementation of digital cinema in the Company’s theatres and to establish agreements with major motion picture studios for the financing of digital cinema.” DCIP entered into long-term digital cinema deployment agreements with six major motion picture studios pursuant to which Kasima LLC, one of DCIP’s subsidiaries, receives a virtual print fee each time the studio books a film or certain other content on the leased digital projection systems. Other content distributors entered into similar agreements that provide for the payment of fees for bookings of the distributor's content on a leased digital projection system.
In the second quarter, Cinemark received $7.4 million in cash distributions from all of its equity investments.
Expense Reduction and Cash Burn
In the second quarter, Cinemark said it reduced its monthly cash burn to $50 million, which continued at a similar rate through July. Management reported a cash balance of $525 million as of July 31, down $46.8 million from June 30. However, during July, the company did not have any interest due on its notes. Based on the company’s pro forma capital structure, cash interest totals approximately $150 million annually.
Based on competitors’ comments, cash burn could be higher in the early days of reopening theaters. AMC stated that through August, cash burn has been higher with theaters open than when they were closed. AMC targeted $100 million per month cash burn in the second quarter. However, in July and August, cash burn averaged $117 million per month.
Cinemark’s comments regarding operating costs while open suggest similarly elevated costs in the post-reopening period. “We expect there'll be a startup cost for implementing this as we get going. That will range between $10 million to $12 million of a one-time cost. That's kind of getting all the fixtures and supplies and everything in place. Beyond that, we are anticipating somewhere between $4 million to $5 million of monthly operating costs for just the execution of that ongoing Cinemark standard,” Sean Gamble, COO, said on the company’s second-quarter call.
Resumption of rent payments could increase cash burn. In the second quarter, Cinemark deferred a substantial portion of rent payments. Facility lease expenses totaled $65.2 million in the second quarter. The company noted, however, that these expenses are “accrual-based and do not reflect the significant lease payment deferrals” negotiated for the second quarter, which Cinemark said exceeded $40 million globally in the quarter. Attached to the 10-Q for the company’s first quarter, Cinemark filed four lease amendments with certain California theaters and landlord Syufy Enterprises requiring payment to resume July 1 after the April 1 through June 30 period in which Cinemark was not required to make any base rent payments.
Internationally, rent expense appears to be more variable. Ex-U.S. facility lease expense fell sequentially to $5.4 million in the second quarter as compared with $16.8 million in the first quarter. Facility lease expense fell just 8.6% sequentially in the United States to $59.8 million in the second quarter. Management stated on the second-quarter call, “We have also received certain abatements to rent, some in the US [but] particularly in international where the laws tend to favor the tenants, and we're also in malls, that when the malls are closed, there really isn't much access oftentimes to our theaters. So that has led to both reductions in minimum rent.”
A breakdown of the company’s historical and current expenses and cash costs is shown below. Variable costs, such as film rentals, concessions and the majority of salaries, fell to almost zero in line with the reduction of attendance and theater closures.
Cinemark has not provided breakeven points for its theaters at different levels of attendance other than to say in the second quarter that it “can operate very effectively and profitably” at 50% of capacity.
Capital and Organizational Structure
As noted above, to date in 2020 Cinemark has borrowed the full amount available under its $100 million revolver, and raised $250 million in secured notes and $460 million in convertible notes to boost liquidity. Pro forma gross leverage through the holdco is approximately 9.3x based on Reorg-calculated EBITDA.
The company’s organizational structure is shown below:
Other than the convertible notes, local foreign debt and capital leases, all of the company’s debt is issued out of Cinemark USA Inc. and guaranteed by parent Cinemark Holdings. Cinemark USA Inc. has significant operations and is parent to the other subsidiaries of the company including both U.S.-based and foreign. The convertible notes are issued by Cinemark Holdings and do not have subsidiary guarantees.
The revolver and term loan are secured by mortgages on certain fee and leasehold properties and security interests in substantially all of Cinemark USA Inc.’s and the guarantors’ personal property, including pledges of all of Cinemark USA Inc.’s capital stock, all of the capital stock of certain of Cinemark USA Inc.’s domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries. Collateral properties securing the bank debt are distinct from those securing the new secured notes, as detailed below.
On Aug. 21, Cinemark entered into an amendment to its credit agreement that extended a waiver for the company to comply with the leverage covenant through Sept. 30, 2021. Upon resumption of the covenant in the subsequent quarter, Cinemark would be able to use the consolidated EBITDA for the first three fiscal quarters of 2019 in lieu of consolidated EBITDA for the corresponding fiscal quarters of 2021. Additionally, the amendment requires Cinemark to maintain a minimum cash and liquidity amount of $100 million.
The secured notes issued on April 13 are secured by 36 properties in the United States. The offering memorandum, as reviewed by Reorg, adds, “The Collateral will be limited so as not to include any property constituting collateral securing Indebtedness or other obligations under the Credit Agreement.”
The properties securing the new notes are listed below. The average remaining terms of the below leasehold properties have an average remaining term of 25 years. As of Dec. 31, 2019, the collateral value of the properties totaled $625.5 million, but the OM adds that the properties were not appraised in connection with the secured note offering.
Finance leases include both equipment and properties. Liabilities associated with finance lease obligations totaled $149 million as of June 30. The company reported a balance of $152.5 million as of Dec. 31 for property under the capital and finance lease asset on its balance sheet. According to the guaranteeing statements included in the 10-K for Cinemark USA, nearly all of the finance lease obligations as of Dec. 31 are either at Cinemark USA or subsidiary guarantors.
As of Dec. 31, Cinemark reported cash of $303.3 million at subsidiary nonguarantors out of a total consolidated cash balance of $488.2 million. The company does not report guaranteeing statements in its quarterly report. Separately, Cinemark reported $124 million of cash at its unrestricted group. It is unclear which entities are included in the unrestricted group.
The convertible notes were issued out of Cinemark Holdings and are not guaranteed by Cinemark USA or its subsidiaries.
--Mark Fischer
2019 10-K
June 30 10-Q
Second Quarter Transcript
Movie theater owner and operator Cinemark Holdings has raised approximately $800 million in new debt and revolver borrowings in 2020 following closures of all of its theaters in the United States and Latin America due to the Covid-19 pandemic. During periods of theater closures and following partial reopenings that kicked off July 24, Cinemark’s cash burn has averaged approximately $50 million per month. Coinciding with the reopening of U.S. theaters in August, Cinemark sold $460 million of convertible notes to increase liquidity to $932 million based on the July 31 reported cash balance and taking into account the net amount raised from the convertible offering. The convertible offering follows a new $250 million issuance of 8.75% secured notes, completed in April.
Continue reading for the Americas Core Credit by Reorg team's initial coverage of Cinemark Holdings, and request a trial to access our coverage of thousands of other distressed and performing credits.
Following delays in new movie releases and uncertainty regarding attendance at open theaters, the new convertible notes have traded down below par:
The company’s other debt, including its term loan, also is indicated below par. Cinemark’s capital structure as adjusted for the recent convertible offering is shown below:
Background and Financial Information
As of June 30, Cinemark operated 534 theaters in the United States and Latin America, with 332 of those in the U.S. In addition to the United States, the company has theaters in Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, and Peru. Within the U.S., 87 theaters are in Texas and 66 in California.
The majority of the company’s revenue is derived from the sale of movie tickets and concessions. Film rental costs are variable and fluctuate with admissions revenue. As a percentage of revenue, film rental costs are generally higher for periods in which more blockbuster films are released.
A breakout of historical financials is below. Prior to the Covid-19 pandemic, in fiscal 2019, Cinemark generated nearly $700 million in Reorg-calculated EBITDA, which excludes equity income, and generated almost $300 million in free cash flow. In the second quarter of this year, with the company’s theaters closed, Cinemark’s revenue fell to $9 million and EBITDA to negative $125 million.
In 2019, Cinemark generated $2.58 billion of revenue in the United States and $702 million internationally. Film rental costs in 2019 were 57% of revenue in the United States and 49% of international revenue. Within the United States, rental costs as a percent of revenue increased from 46% in 2018. The company attributed the increase primarily to a higher concentration of blockbuster films during 2019 compared with 2018 and increased promotional expenses.
Cinemark reported $615.2 million of EBITDA and spent $230.6 million on capital expenditures in the United States in 2019. The company reported $129.9 million of EBITDA and spent $73.1 million on capital expenditures internationally in 2019.
Joint Ventures and Equity Investments
Cinemark owns 40.9 million shares of National CineMedia, which provides advertising to Cinemark’s theaters through its branded “Noovie” pre-show entertainment program. Cinemark receives a monthly theater access fee for participation in the NCM network and also earns screen rental revenue on a per-patron basis or revenue-share basis depending on the placement of the advertisement.
Cinemark also owns a 24.3% economic interest in Digital Cinema Implementation Partners, a joint venture with AMC and Regal, “to facilitate the implementation of digital cinema in the Company’s theatres and to establish agreements with major motion picture studios for the financing of digital cinema.” DCIP entered into long-term digital cinema deployment agreements with six major motion picture studios pursuant to which Kasima LLC, one of DCIP’s subsidiaries, receives a virtual print fee each time the studio books a film or certain other content on the leased digital projection systems. Other content distributors entered into similar agreements that provide for the payment of fees for bookings of the distributor's content on a leased digital projection system.
In the second quarter, Cinemark received $7.4 million in cash distributions from all of its equity investments.
Expense Reduction and Cash Burn
In the second quarter, Cinemark said it reduced its monthly cash burn to $50 million, which continued at a similar rate through July. Management reported a cash balance of $525 million as of July 31, down $46.8 million from June 30. However, during July, the company did not have any interest due on its notes. Based on the company’s pro forma capital structure, cash interest totals approximately $150 million annually.
Based on competitors’ comments, cash burn could be higher in the early days of reopening theaters. AMC stated that through August, cash burn has been higher with theaters open than when they were closed. AMC targeted $100 million per month cash burn in the second quarter. However, in July and August, cash burn averaged $117 million per month.
Cinemark’s comments regarding operating costs while open suggest similarly elevated costs in the post-reopening period. “We expect there'll be a startup cost for implementing this as we get going. That will range between $10 million to $12 million of a one-time cost. That's kind of getting all the fixtures and supplies and everything in place. Beyond that, we are anticipating somewhere between $4 million to $5 million of monthly operating costs for just the execution of that ongoing Cinemark standard,” Sean Gamble, COO, said on the company’s second-quarter call.
Resumption of rent payments could increase cash burn. In the second quarter, Cinemark deferred a substantial portion of rent payments. Facility lease expenses totaled $65.2 million in the second quarter. The company noted, however, that these expenses are “accrual-based and do not reflect the significant lease payment deferrals” negotiated for the second quarter, which Cinemark said exceeded $40 million globally in the quarter. Attached to the 10-Q for the company’s first quarter, Cinemark filed four lease amendments with certain California theaters and landlord Syufy Enterprises requiring payment to resume July 1 after the April 1 through June 30 period in which Cinemark was not required to make any base rent payments.
Internationally, rent expense appears to be more variable. Ex-U.S. facility lease expense fell sequentially to $5.4 million in the second quarter as compared with $16.8 million in the first quarter. Facility lease expense fell just 8.6% sequentially in the United States to $59.8 million in the second quarter. Management stated on the second-quarter call, “We have also received certain abatements to rent, some in the US [but] particularly in international where the laws tend to favor the tenants, and we're also in malls, that when the malls are closed, there really isn't much access oftentimes to our theaters. So that has led to both reductions in minimum rent.”
A breakdown of the company’s historical and current expenses and cash costs is shown below. Variable costs, such as film rentals, concessions and the majority of salaries, fell to almost zero in line with the reduction of attendance and theater closures.
Cinemark has not provided breakeven points for its theaters at different levels of attendance other than to say in the second quarter that it “can operate very effectively and profitably” at 50% of capacity.
Capital and Organizational Structure
As noted above, to date in 2020 Cinemark has borrowed the full amount available under its $100 million revolver, and raised $250 million in secured notes and $460 million in convertible notes to boost liquidity. Pro forma gross leverage through the holdco is approximately 9.3x based on Reorg-calculated EBITDA.
The company’s organizational structure is shown below:
Other than the convertible notes, local foreign debt and capital leases, all of the company’s debt is issued out of Cinemark USA Inc. and guaranteed by parent Cinemark Holdings. Cinemark USA Inc. has significant operations and is parent to the other subsidiaries of the company including both U.S.-based and foreign. The convertible notes are issued by Cinemark Holdings and do not have subsidiary guarantees.
The revolver and term loan are secured by mortgages on certain fee and leasehold properties and security interests in substantially all of Cinemark USA Inc.’s and the guarantors’ personal property, including pledges of all of Cinemark USA Inc.’s capital stock, all of the capital stock of certain of Cinemark USA Inc.’s domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries. Collateral properties securing the bank debt are distinct from those securing the new secured notes, as detailed below.
On Aug. 21, Cinemark entered into an amendment to its credit agreement that extended a waiver for the company to comply with the leverage covenant through Sept. 30, 2021. Upon resumption of the covenant in the subsequent quarter, Cinemark would be able to use the consolidated EBITDA for the first three fiscal quarters of 2019 in lieu of consolidated EBITDA for the corresponding fiscal quarters of 2021. Additionally, the amendment requires Cinemark to maintain a minimum cash and liquidity amount of $100 million.
The secured notes issued on April 13 are secured by 36 properties in the United States. The offering memorandum, as reviewed by Reorg, adds, “The Collateral will be limited so as not to include any property constituting collateral securing Indebtedness or other obligations under the Credit Agreement.”
The properties securing the new notes are listed below. The average remaining terms of the below leasehold properties have an average remaining term of 25 years. As of Dec. 31, 2019, the collateral value of the properties totaled $625.5 million, but the OM adds that the properties were not appraised in connection with the secured note offering.
Finance leases include both equipment and properties. Liabilities associated with finance lease obligations totaled $149 million as of June 30. The company reported a balance of $152.5 million as of Dec. 31 for property under the capital and finance lease asset on its balance sheet. According to the guaranteeing statements included in the 10-K for Cinemark USA, nearly all of the finance lease obligations as of Dec. 31 are either at Cinemark USA or subsidiary guarantors.
As of Dec. 31, Cinemark reported cash of $303.3 million at subsidiary nonguarantors out of a total consolidated cash balance of $488.2 million. The company does not report guaranteeing statements in its quarterly report. Separately, Cinemark reported $124 million of cash at its unrestricted group. It is unclear which entities are included in the unrestricted group.
The convertible notes were issued out of Cinemark Holdings and are not guaranteed by Cinemark USA or its subsidiaries.
--Mark Fischer
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