June 19, 2020 / 4:16 PM / 2 months ago

Lenders' relief at Cineworld's alternate ending

LONDON, June 19 (LPC) - Lenders are breathing a sigh of relief at Cineworld’s aborted takeover of Canada’s Cineplex as US$2.277bn of loans are effectively cancelled, letting them off the hook for losses that would have been booked had the deal closed.

Cineworld had lined up a US$1.93bn secured incremental Term Loan B and an approximate US$347m unsecured bridge loan to back the US$1.65bn acquisition, which was underwritten by Bank of America, HSBC and Goldman Sachs. The longstop date on the financing is in the second week of July.

The seven-year incremental TLB was syndicated in February and priced at 300bp over Libor, at a 99 OID and freed to trade in the secondary market.

However, the impact of Covid-19 and the lockdown that was implemented across the globe led the TLB to plummet to 58 cents on the dollar in March and to a low of 57 in May, resulting in huge potential losses for investors that would have been realised once the M&A closed. But because the M&A is off and the financing cancelled, those trades will be unwound and treated as if they never happened.

Investors who bought into what has historically been one of the most stable of asset classes “suddenly faced the maelstrom of Covid in a sector which was most exposed” but now “find themselves hoisted from a sinking ship by a rescue helicopter”, a syndicate head said.

“Many investors would have gone in near par and sold out on the way down and theoretically, had the deal closed, booked substantial losses and been absolutely gutted. This is totally a get out of jail free card.”

BIG LOSS

A US$1.9bn term loan trading at 57 cents on the dollar equates to an approximate US$800m loss of value. While most loans have traded lower as a result of the coronavirus pandemic, this is a particularly deep discount into distressed territory. Cinemas were forced to close during lockdown and it is unclear when or how they will reopen as governments insist on social distancing measures.

“We are very happy the deal has been pulled,” an investor said.

The arranging banks will be missing out on fees of around US$50m, based on a typical fee structure of 2% on a loan and 3% on a bridge.

The bridge had not been sold down either, which presented some risk for the banks, although it was supposed to be repaid with capital attained from asset disposals as a consequence of the acquisition.

“The financing is effectively ripped up, the deal goes away, the banks are not paid, investors are not paid ticking fees and all trades are unwound. Those loans trading at 57 cents on the dollar effectively get repaid at par so investors will be jumping up and down,” a second syndicate head said.

“While banks may be relieved the bridge has been cancelled, given it was expected to be repaid by asset disposals, it can be said with confidence the biggest relief is on the side of investors.”

Cineworld said on June 12 that it would not go ahead with the acquisition, citing a “material adverse effect” as a result of the coronavirus crisis. (Editing by Christopher Mangham)

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