The clock is ticking for movie theaters.
As coronavirus cases rise in the United States, cinemas around the country are finding their plans for reopening in jeopardy, and that’s putting a greater strain on a section of the economy that’s been hit hard by the public health crisis. For years, movie theater chains such as AMC and Cineworld embarked on a mergers-and-acquisitions spree financed by debt that left them highly leveraged. Their balance sheets became further taxed by efforts to improve their offerings, including tearing out seats to add high-end recliners, all of which came with a hefty price tag.
When COVID-19 struck, these theaters were forced to turn off their marquee lights, leaving them with no revenue for months. They furloughed staff, applied for federal assistance and raised money through debt offerings, but they still have to pay rent and honor lease obligations, which has required them to burn through tens of millions of dollars a month. After initially hoping to open the bulk of their screens in early July, many of the major chains pushed back that 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,” says Eric Handler, an analyst with MKM Partners. “The big question is how fast does attendance ramp up. They don’t want to be forced to raise more cash, because every time they do it puts a greater burden on their balance sheets. More than anything, they need theaters to reopen, and they need that to happen sooner rather than later.”
Movie theaters are also dealing with a different scale than the studios that provide the films they screen. It’s not easy for them to wait out the shutdown, forgoing potentially hundreds of millions of dollars in ticket sales while box offices remain shuttered. The likes of Disney, Warner Bros. and Universal are small parts 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 some time to return to cinemas.
“Studios would love to make some money, but they’re not in as much of a rush to get a return on their investment,” says Eric Wold, an analyst with B. Riley & Co. “You already saw them pushing movies like ‘Minions’ and ‘Fast & Furious’ into 2021. If it turns out that consumer behavior changes and people don’t go back to theaters like they once did, studios can adjust. They can make more content for streaming services, which might even yield higher returns.”
When it comes to credit markets, some exhibitors may be nearly tapped out. AMC Entertainment ended 2019 with more than $4.75 billion in corporate borrowings, and in April revealed plans to raise $500 million in new debt. The chain is also negotiating a debt exchange, hoping to bolster its liquidity.
Regal parent Cineworld has $3.49 billion in loans and borrowings; compounding those headaches, the company is now facing possible legal action after it pulled out of a $2.1 billion deal to buy Canadian exhibition chain Cineplex. Among its publicly traded peers, Cinemark and Imax are the most conservative. Cinemark closed out the year with $1.78 billion in long-term debt. Imax has far less debt by comparison, with $246 million in total liabilities, including only $18.2 million in bank indebtedness.
AMC, the most heavily indebted of these chains, says it has enough cash to operate through November, but it was forced to note in financial filings that there were questions about its ability to continue as “a going concern.” For the time being, movie theaters will do everything they can to renegotiate with their creditors. Bankruptcy, never a particularly attractive option, will be especially problematic when the future of moviegoing is so cloudy. Few companies will want to buy a theater chain when it’s so uncertain that they will be able to operate profitably during a pandemic.
“It would be hard to find a buyer for AMC,” says Zev Shechtman, a partner at Danning Gill. “There’s no light at the end of the tunnel for the theater business, so it’s hard to see what they can achieve through bankruptcy.”
There may be other options for movie theaters if credit markets get cold feet. The Federal Reserve has begun buying corporate bonds, which could ultimately include those of major companies such as AT&T, Comcast and Verizon. This relatively new action from the nation’s central bank “might infer that the Fed is anticipating a corporate debt problem,” says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. And while AMC’s nearly $5 billion in debt is nothing to sneeze at, whether that amount will be great enough to register on the Fed’s radar is another question.
“We’re just starting to see the corporate debt that the Fed has been buying,” says Achuthan. “But it’s like Toyota, or Berkshire Hathaway or Verizon. It tends to be these slightly bigger companies. So I just don’t know if they’re going to get into the relative weeds and buy this kind of debt.”
And the issue of AMC Theatres’ foreign ownership — the country’s largest theater chain is owned by China-based Wanda Group — could present several issues, says Aynne Kokas, an assistant professor of media studies at the University of Virginia and the author of “Hollywood Made in China.”
“First of all, it could be viewed as subsidizing a Chinese-owned media firm in an environment where there are serious questions about how Chinese media disinformation is functioning within the U.S. context,’ she says. The second issue is whether the movie distribution industry merits a government subsidy when other sectors, like health care and education, are also in need.
“Given the kind of long-term potential public health risks, as well as the long-term progressive decline of theatrical distribution, is this the place where debt purchases should be focused, or should it be focused on other areas?” asks Kokas.
Exhibitors have devised plans to reopen safely. Companies such as AMC and Regal will show movies in theaters that are at half or a quarter of their capacity so that audience members can socially distance. They’ve invested in new ventilation systems and vacuums, are pushing customers to buy tickets online while ramping up their cleaning schedules, and, after a public fracas, will mandate that guests wear masks. And yet, all it takes is for a few people to get sick after going to the cinema to raise public doubts about whether going to the movies is a fun form of escapism or a risky proposition. When they do reopen, theaters may be spending all this extra money on safety procedures while still being forced to pay their interest payments.
“Debt doesn’t go away,” says Wold. “Even if they get over the initial hump of getting theaters open again, they have to hope that attendance goes back to normal pretty quickly. They’re going to be using a lot of that cash flow toward interest payments, and while they’re servicing that debt they won’t be able to spend money fixing up theaters or adding better seats or doing a thousand other things that improve their customers’ experiences.”
Of course, what does normal even look like? Achuthan has “pretty high confidence that the recession ends this summer,” and that the economy begins to see shoots of a recovery. But the number of other variables that the future potentially holds, such as geopolitical strife or investor concerns about overheated valuations, mean that the stock market — and by that measure, exhibitors’ valuations — won’t necessarily march higher right away.
Theaters like AMC are “trying to get across this valley,” he says. “Everything needs to kind of work out. Otherwise, this valley could be quite a bit wider than they can handle.”