Alamo Drafthouse Cinema did everything it could to weather the COVID-19 pandemic. It furloughed most of the staff, cut pay for those who remained, rented out theaters for private events, paused costly development projects, leaned on its merchandising business to keep revenue coming in, and launched an on-demand movie service.
In the end, it was not enough. The company — the largest privately held theater chain in the U.S. — filed for bankruptcy protection on Wednesday morning.
Alamo Drafthouse joins Studio Movie Grill and Cinemex, two other sizable theater chains that also found they could not survive the prolonged shutdown and the absence of new releases without bankruptcy protection.
According to a court declaration filed in Delaware, Alamo Drafthouse was no longer able to service about $105 million in long-term debt.
“By the end of 2020, it became clear to the Debtors that they needed immediate relief from their overwhelming debt burden, as operational fixes were not enough to overcome the impact of COVID-19 and industry headwinds,” wrote Matthew Vonderahe, the company’s chief financial officer.
Alamo Drafthouse had borrowed the $105 million from Bank of America and several other banks in June 2018. The company is a leader in the dine-in theater trend, and had a fairly good year in 2019, outpacing the exhibition industry by 5%. According to Vonderahe, it entered 2020 in a strong liquidity position.
But the pandemic took its toll. Even now, with government restrictions largely lifted around the country, only six of the 18 company-owned locations are open, and business there is only around 20% of capacity.
Alamo Drafthouse sought to renegotiate its debt with Bank of America and the other banks, but found they could not reach a deal that would provide the capital needed to keep operating. So instead, Altamont Capital — holder of 40% of the company’s equity — brought in Fortress Investment Group to help buy the debt from the banks.
Tim League, the founder of Alamo Drafthouse, and Dave Kennedy, a longtime co-owner and board member, remain involved as minority partners with Altamont and Fortress. According to the court records, League bought 2.7% of the debt.
League founded the theater chain in 1997 in Austin, Texas, growing it into a franchise that has roughly 40 locations. The company drew a devoted following with its food and beverage service (which includes movie-themed cocktails), the special events it hosts tied to cult or blockbuster movies, and its strictly enforced “no talking” rule.
Theaters around the country were closed for months in 2020 and a planned reopening last summer failed to bring customers back in force before another surge of the virus happened in the fall and winter.
In August, Alamo tapped Houlihan Lokey to explore a possible sale of the company and test the interest in the market.
The deal with Fortress, consummated in early January, gave the company another $4 million of runway, and allowed it to continue to seek flexibility from some landlords and trade vendors.
In February, Fortress, Altamont and League agreed to provide another $2 million, bringing the total debt to $112.7 million. (The company also got a $10 million loan from the PPP program.)
However, the lenders also made clear that they could not provide any further capital unless it came with the benefits of bankruptcy. Under the bankruptcy plan, Fortress and Altamont have agreed to provide up to an additional $20 million in debtor-in-possession financing, with a steep 15% annual interest rate. League remains involved the bankruptcy financing as well, providing his 2.7% share.
If all goes according to plan, Fortress, Altamont and League will convert their debt to equity in the reorganized company. It is still to be determined how the equity in the new company will be divided among the partners, and the process is open to rival bids. The theater chain will continue to operate. The firm currently employs 107 full-time and 205 part-time workers.
With vaccines getting distributed and cinemas getting the green light to re-open in New York City, the sector is hoping that it can begin rebounding in the coming months.
“We’re extremely confident that by the end of 2021, the cinema industry — and our theaters specifically — will be thriving,” said League in a statement.
Correction: This story has been updated to make clear that Tim League remains active in the debt financing and reorganization of the company, with a 2.7% stake in the debt rounds.