Cineworld Down 84% On Year, 42% Today – Is This The Death Spiral?

Cineworld (LON: CINE) shares are down 42% today to take the performance since this year's high to 84% down. Don't forget, today's 42% down is from the already greatly depressed levels that it traded at yesterday. It's possible to think that this is the death spiral and there may not be that meme stock boost which samved AMC (NYSE: AMC). In fact, it's entirely possible to think, after this latest release, that it's only something like becoming a meme stock – thus trading entirely irrationally – which will save CINE shares. That might be taking it a little too gloomily but perhaps not as well.

The background here is interesting even if reasonably well known. The capital and debt structure at Cineworld wasn't terribly, hugely, strong before lockdown. Lockdown then made it all considerably worse of course. But the truly big issue was the bid for Cineplex just before it all went bad. Given lockdown Cineworld tried to pull out but the courts are having none of it. It's getting down to where it was the drafting of the contract . This all gets a little mystifying to the likes of us but one reading is that if there had been a clause which said “Ah, but!” (or a material events clause perhaps more formally) then Cineworld could have pulled out. There wasn't – apparently – so Cineplex is due compensation for the deal not happening. This being a fee that Cineworld doesn't have and has little hope of finding.

What we've got today is an update on the capital structure and trading performance.

Also Read: Cineworld Shares, An Overview and How To Buy

So, what's today's announcement which has triggered this latest fall? The one big hope – even as it was a fairly unlikely hope – was that us all rushing back to the movies would provide the revenue to enable the debt burden to be supported. Today's announcement says this ain't so: ” recent admission levels have been below expectations. These lower levels of admissions are due to a limited film slate that is anticipated to continue until November 2022 and are expected to negatively impact trading and the Group's liquidity position in the near term.” Or, in English, we're not earning as much as we'd hoped.

This really only leaves one other option. Well, two in fact, the second being to go bust. The actual cinema chain is worth something, it operates and so on. It's that capital structure, the whole being balanced on too little capital and too much debt that is the problem. Going bust (administration say, or Chapter 11 even though that doesn't exist in England) would free the chain of the debt burden but also, obviously enough, it would kill any remaining equity value.

The other option is a capital raise which is what they mention. Or a debt for equity swap perhaps – but that would ” Any deleveraging transaction will likely result in very significant dilution of existing equity interests in Cineworld.” So the equity would be worth near nothing that way as well. In fact, the more CINE shares fall, the worse any dilution would be to raise any particular capital sum or debt for equity swap. So, in a sense, this is indeed a death spiral.

The big question becomes, well, how much might that rump equity be worth if the capital structure could be changed? And the answer there really has to be “Well, do you feel lucky today, do ya?”