Cineworld Plummets as it Outlines Worst-Case Virus Scenario

(Bloomberg) --

Cineworld Group Plc, the world’s second-biggest cinema company, lost almost half its market value at one point on Thursday after it said its worst-case scenario for the coronavirus outbreak could put it at risk of breaching lending covenants.

The shares have pared losses, bringing their year-to-date decline to 68% and making the company among the worst performers in the Euro Stoxx 600 so far in 2020. Cineworld has not seen a material impact from the pandemic, it said in a statement.

In a scenario where the virus impact causes a loss of as much as three months’ revenue, an inability to reduce its fixed costs to cope with site closures, and other assumptions, Cineworld would be at risk of breaching debt covenants. The company has a credit line whose terms can be triggered when it is more than 35% drawn, and loans with terms that limit the ratio of net debt to earnings to 5.5 times.

“I am of course conscious of the possibility that events could develop adversely very quickly and change this position in the short term, but I remain confident that the crisis will ultimately pass,” Chairman Anthony Bloom said in the statement.

Cineworld says it hasn’t reached the 35% threshold in its credit line covenants, and doesn’t expect to. The company’s ratio of net debt to adjusted earnings before interest, tax, depreciation and amortization was 3.4 times at the end of 2019, Citigroup Inc. analyst Natasha Brilliant said in a research note.

Liquidity Focus

However, investors had already been betting against the chain: it was popular with short-sellers even before the scale of the coronavirus outbreak began to roil markets, due to a weaker film slate than recent years and the surge of streaming services like Netflix Inc.

Cineworld has planned measures to mitigate any hit if customers are forced to stay home, including delaying capital spending and cutting costs to maintain cash.

“We believe the chief concern for investors has turned to liquidity,” Brilliant wrote. “The business outlook remains uncertain due to the Coronavirus outbreak.”

The most recent bad omen was the delay of the new James Bond blockbuster ‘No Time to Die’ to November from April. Analyst Ivor Jones at Peel Hunt said the top 10 movies account for about 40% of box-office revenue in a typical year, and the Bond delay was unlikely to be the last. Shares in Cineworld’s rivals like Cinemark Holdings Inc., IMAX Corp. and AMC Entertainment Holdings Inc. have also fallen.

Analysts at Peel Hunt said Cineworld should abandon its deal to acquire Canadian chain Cineplex, given the market turbulence. The company said in Thursday’s statement it expects to complete the acquisition.

--With assistance from Lisa Pham.

To contact the reporter on this story: Thomas Seal in London at tseal@bloomberg.net

To contact the editors responsible for this story: Jennifer Ryan at jryan13@bloomberg.net, Katie Linsell

©2020 Bloomberg L.P.