Time is running out for cinemas.
As coronavirus cases increase in the United States, theaters across the country are seeing their reopening plans threatened, putting a strain on a part of the economy hit hard by the public health crisis. For years, movie chains like AMC and Cineworld embarked on a wave of debt-financed mergers and acquisitions that left them heavily in debt. Their balance sheets have been taxed even more by efforts to improve their offerings, including ripping seats to add high-end recliners, all at a hefty price tag.
When COVID-19 hit, these theaters were forced to turn off their marquee lights, leaving them with no income for months. They’ve put staff on leave, asked for federal help, and raised money through debt offers, but they still have to pay rent and honor lease obligations, which has forced them to spend tens of millions of dollars. per month. After initially hoping to open most of their screens in early July, many large chains have pushed back this launch date to the end of the month.
“Most of these chains have enough money to get them through this year, but the next year is trickier,” said Eric Handler, analyst at MKM Partners. “The big question is how quickly attendance is increasing. They don’t want to be forced to raise more money, because every time they do it it adds to their balance sheet. More than anything, they need theaters to reopen, and they need that to happen ASAP. “
Movie theaters also face a different scale than the studios that deliver the movies they show. It is not easy for them to wait for the closing, potentially forgoing hundreds of millions of dollars in ticket sales as the counters remain closed. The likes of Disney, Warner Bros. and Universal are small parties in sprawling entertainment conglomerates. They have other ways of making money during the shutdown and more of a financial cushion to fall back on if audiences take a while to return to theaters.
“The studios would love to make the money, but they’re not in such a rush to get a return on their investment,” says Eric Wold, analyst at B. Riley & Co. “You’ve seen them push movies like ‘Minions’ and ‘before’ Fast & Furious “until 2021. If it turns out that consumer behavior is changing and people aren’t going back to the movies like they used to, studios can adapt. They can create more content for streaming services, which might even generate higher returns. “
When it comes to credit markets, some exhibitors may be almost sold out. AMC Entertainment ended 2019 with more than $ 4.75 billion in corporate debt and in April revealed plans to raise $ 500 million in new debt. The chain is also negotiating a debt swap, hoping to bolster its liquidity.
Royal parent company Cineworld has $ 3.49 billion in loans and borrowings; Compounding those headaches, the company now faces possible legal action after it pulled out of a $ 2.1 billion deal to buy Canadian exhibition chain Cineplex. Among its listed peers, Cinemark and Imax are the most conservative. Cinemark ended the year with long-term debt of $ 1.78 billion. Imax has much less debt in comparison, with total liabilities of $ 246 million, of which only $ 18.2 million is bank debt.
AMC, the most heavily indebted of those chains, says it has enough cash to operate until November, but was forced to note in financial documents that there were questions about its ability to continue in business. For now, the cinemas will do everything to renegotiate with their creditors. Bankruptcy, which is never a particularly attractive option, will be particularly problematic when the future of cinema is so cloudy. Few companies will want to buy a movie chain when it is so uncertain that they will be able to operate profitably during a pandemic.
“It would be difficult to find a buyer for AMC,” says Zev Shechtman, partner at Danning Gill. “There’s no light at the end of the tunnel for theater companies, so it’s hard to see what they can accomplish by going bankrupt. “
There may be other options for theaters if the credit markets are cold in the eyes. The Federal Reserve has started buying corporate bonds, which may eventually include those of large companies such as AT&T, Comcast and Verizon. This relatively new move by the country’s central bank “could infer that the Fed is anticipating a corporate debt problem,” said Lakshman Achuthan, co-founder of the Business Cycle Research Institute. And while AMC’s nearly $ 5 billion debt is not insignificant, whether that amount will be large enough to get on the Fed’s radar is another question.
“We’re just starting to see the corporate debt that the Fed has bought,” Achuthan said. “But it’s like Toyota, or Berkshire Hathaway or Verizon. Usually these are those slightly larger companies. So I just don’t know if they’re going to get into the relative weeds and buy that kind of debt.
And the question of AMC TheatersForeign ownership – the country’s largest theater chain is owned by the China-based group Wanda – could present several problems, says Aynne Kokas, assistant professor of media studies at the University of Virginia and author of “Hollywood Made in China “.
“First of all, it could be seen as a grant to a Chinese-owned media company in an environment where there are serious questions about how Chinese media disinformation works in the American context,” she said. The second question is whether the film distribution industry deserves a government subsidy when other sectors, such as health care and education, are also in need.
“Given the kind of potential long-term public health risks, as well as the long-term gradual decline in theatrical distribution, is this the place where debt buying should be concentrated or should it be concentrated?” on other areas? Kokas asks.
Exhibitors have made plans to reopen safely. Companies such as AMC and Regal will show films in theaters that are at half or quarter of their capacity so that members of the public can distance themselves socially. They’ve invested in new ventilation systems and vacuum cleaners, are pushing customers to buy tickets online while speeding up their cleaning schedules and, after a public crash, will force guests to wear masks. And yet, it only takes a few people who get sick after going to the movies to make audiences doubt whether going to the movies is a fun form of escape or a risky proposition. When they reopen, theaters could spend all that extra money on security procedures while still being forced to pay their interest.
“Debt doesn’t go away,” says Wold. “Even if they overcome the initial hurdle of reopening theaters, they have to hope that attendance will return to normal fairly quickly. They’re going to use a lot of that cash flow to pay the interest, and while they’re paying off that debt, they won’t be able to spend any money fixing theaters or adding better seats or doing a thousand other things. that improve their customer experiences.
Of course, what does even normal look like? Achuthan has “fairly high confidence that the recession will end this summer” and that the economy is starting to see spurts of recovery. But the number of other variables the future potentially holds, such as geopolitical conflicts or investor concerns about overheated valuations, means that the stock market – and by that measure, exhibitor valuations – won’t necessarily rise. right now.
Theaters like AMC are “trying to get through this valley,” he says. “Everything has to work out. Otherwise this valley might be a little wider than they can handle.