Why Bankruptcy May Not Be The Best Option Now For Ailing Hollywood Businesses – The Hollywood Reporter

Until this year, the world was getting good enough to chill out in cinemas. The seats were getting bigger and bigger and made of better quality fabric. And unlike airplanes, consumers were encouraged to recline the seat as far as possible. But then the novel coronavirus has spread, and something has changed. What can cinema seats teach us about the economic impact of a health pandemic? Take the Chapter 11 bankruptcy of VIP Cinemas Holdings, a multinational corporation and the world’s largest manufacturer of luxury recliners for theaters.

On February 18, VIP Cinemas filed for bankruptcy, which at first glance might seem like bad news. But that debtor came to Delaware court with what scholars call a “prepackaged reorganization plan.”

VIP Cinemas asked a lender to put money for operations during the bankruptcy process. VIP’s creditors had agreed to swap debts for equity in the company. A private equity firm even agreed to a new investment of $ 7 million. In total, VIP had a plan to deleverage its balance sheet of around $ 178 million and position its business with enough cash to not only stabilize but also grow the business.

At least that was the plan. On March 23, the giant of the film exhibition Regal Cinemas objected. In a scuffle with VIP for the purchase of 676,000 recliners, Regal said, “Due to the recent and unfortunate outbreak of a new coronavirus and the resulting spread of COVID-19, many cinemas are turning up. are clouded … There is no reasonable probability that the reorganization proposed by the plan will be successful. The plan was drafted and tabled before the current economic and public health crisis developed. “

Sadly, here is the sad truth of the current economic crisis – it has become so severe that bankruptcy has in fact become a bad option for many struggling businesses. Case in point: VIP Cinemas told a judge on April 3 that its debt-for-equity restructuring plan was no longer feasible and that it was abandoning its Chapter 11 restructuring. “We are truly living in unprecedented times.” VIP lawyer Cristine Schwarzman said at the hearing.

“I don’t think there will be a wave of Chapters 11 next week,” says Paul Zumbro, head of the restructuring practice at Cravath, Swaine & Moore. “There is the difficulty of getting DIP [debtor-in-possession] funding. You have to show a budget to the lenders, and if you are unable to give a forecast, it will be difficult to get a lender to provide this financing. You must also show a way to an exit. “

Zumbro brings up another reason he doesn’t see bankruptcy in the immediate future: the lack of interest in acquiring distressed assets. No potential buyer means a less attractive bankruptcy auction. “It almost seems like we have a quarantine on transactions as well as the quarantine that we all do at home,” he says.

Some companies may have little choice but to go into “free fall” bankruptcy – that is, without a well executed plan, which could lead to something, including liquidation. These companies will find themselves strapped for cash and creditors will not be willing to renegotiate the timing of debt obligations, with a liquidity crisis where bankruptcy protections offer the only saving grace.

But for the most part, Brad Sandler of Pachulski Stang agrees: “To put a business out of business now would be destructive value for most businesses.”

The government is doing what it can to keep the economy going. The Federal Reserve worked on unblocking credit markets while Congress passed a $ 2 trillion stimulus package. But unfortunately for those in the entertainment industry, the bailouts seem to have prioritized reducing airline seats over more luxurious cinema seats. Small businesses are eligible for loans under the plan, but large conglomerates outside the transportation sector will likely need to save money to get out of the recession. And on the road? One indicator of an economic recovery could be when companies start to see the value of Chapter 11 again.

According to Sandler: “If there is an increase in bankruptcy filings, it means that credit has opened up and buyers are back in the market. Bankruptcies are usually bad news, but here it may indicate that the markets are resuming their activity. “

This story first appeared in the April 8 issue of Hollywood journalist magazine. Click here to subscribe.

About Marc Womack

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