Picture this – What the Cineworld ruling means for hospitality and leisure

Earlier this autumn, the English Courts approved a restructuring of Cineworld, the cinema group that operates at leisure locations across the U.K. The case followed a challenge by two objecting landlords and has potential read-across for the entire hospitality and leisure industry. It highlights use of a nascent type of restructuring method – the “Restructuring Plan” (RP) – which has also been used by Prezzo and Revolution Bars Group, amongst others, recently. 

This method for court-supervised compromises with both secured and unsecured creditors is an increasingly powerful tool for restructuring the debts of a company, and some would argue marks a move away from company voluntary arrangements (CVAs) to an RP “era”. This could prove particularly pertinent at a time when it seems a rising number of companies face into the need to right-size operations and overheads, as a necessary step towards securing long-term viability, especially in the wake of the recent Budget. 

The Cineworld case showed that this process comes with some complexities – including elements that had never been tested in court before – but in simple terms, and unlike a CVA, an RP can be approved by a court in a scenario whereby the majority of creditors are not necessarily in favour – and it nevertheless becomes binding on all creditors.

Background to Cineworld's challenges

Cineworld was severely impacted by the pandemic and government restrictions. While a reorganisation led by Cineworld’s sister company in the U.S., Regal Cinemas, under Chapter 11 of the US Bankruptcy Code in 2022, provided some liquidity and headroom in relation to the group indebtedness, it did not address Cineworld’s lease liabilities over its cinema sites – a significant number of which were “over-rented” (with contractual rent in excess of fair market rent). 

This factor, together with difficult trading conditions, exacerbated by the screen actors’ and writers’ strikes in 2023, resulted in Cineworld continuing to suffer severe difficulties. As the group faced into the summer it was clear that, with the September quarter rent falling due, insolvency would have been unavoidable and intervention was required. 

Demystifying the RP process

Working with the global group board, we assessed what alternative options were available. It became clear that, absent an RP, the most realistic alternative would be a sale of the key Cineworld assets to Regal. 

However, this would need to be affected via a potentially value-destructive insolvency event, such as administration, and so instead it was considered appropriate to pursue an RP. The terms of the RP would primarily focus on rebasing rents on potentially viable sites in line with the market, and exiting sites that were unlikely to be viable even at a true market rent. Intercompany loans would also be written off, financial creditors would also give concessions to aid cashflow, and other historic liabilities would also be compromised.

A total of 32 classes of creditor were convened across the Cineworld restructuring plans. The secured term loan lenders and secured intercompany lender approved the plans. Among the classes comprising landlords, general property creditors and business rates creditors, results were mixed: overall, 12 classes approved and 20 classes voted against the plans. 

What was unique about this case – and arguably the cause of some controversy – was that Cineworld previously consensually renegotiated some of its UK leases in 2023, before this latest process. In exchange for rent reductions at that time, Cineworld entered into several side letters with the tenants agreeing that, if Cineworld entered into a RP or CVA, then these leases would be excluded from the process.

However, Cineworld’s RP sought to impose additional impairments beyond what had been contractually agreed in 2023 – on the basis that the sites subject to these side letters were still over-rented, even after the reductions associated with the side letters. Not including these landlords in the RP might have been considered to be favourable treatment when compared with other landlords, which the UK Courts typically do not allow. 

The Court accepted Cineworld’s evidence that, at the time of the side letters, the company had underestimated a number of factors, for example: the impact of the actors’ and writers’ strikes on the pipeline of films; the increase in the national living wage (higher than anticipated); and lower-than-anticipated cinema attendances. The Court accepted that, accordingly, the deterioration of the UK group’s trading performance since those side letters, had been greater than projected. 

Takeaways and learnings for hospitality and leisure 

Aside from this headline issue however, there are several other key takeaways from the process: 

• One is the importance of companies assessing the feasibility/benefit of an RP as early as possible, and then working up a realistic timetable that allows for slippage/delays to ensure that the plan can be sanctioned in time prior to an (often critical) upcoming rent quarter date. This is because, unlike other restructuring processes, the lead time for implementation of an RP can be several months. 
• Linked to this point, a company’s financial forecasts are key to determining the terms of the RP, and therefore need to be robustly tested and agreed at the outset of the process. It is therefore important to socialise the forecasts with all internal stakeholders as soon as possible in order to achieve a consensus, and to prevent later delays.
• In terms of that preparation, it was essential to be as comprehensive as possible and to demonstrate clearly to creditors and the Court why the RP would fix the fundamental problem. Preparation of pre- and post-RP business plans were vital to demonstrating this. The case also highlighted the need for transparency – most RPs are subject to some level of challenge by creditors, who will have a right to review key information that informs the need for the RP – and so everything should be prepared assuming as though opposing creditors will get access to it. Key decisions should be recorded contemporaneously. 
• Given the RP process is relatively new, companies can be creative and innovative with terms to achieve the desired outcome – just because it hasn't been done before, doesn't mean it isn't possible. Here, we were able to create RP terms that will have allowed some cinemas to remain open, that would otherwise have closed if an existing RP precedent had been followed.
• A fundamental component of an RP is that it must ensure that creditors are no worse off than the “relevant alternative” if the RP were not implemented – in this case, that was identified to be the Administration process mentioned earlier. Robust evidence of why the “relevant alternative” is what it is stated to be is therefore vital – and in this case it was supported by witness statements from all major stakeholders. 

The case evidences again that there is a rescue culture in the courts and that, if there is a fair plan, they will look to endorse it, whether the majority of creditors back the proposals, or not.

This article was previously published in Propel.