Movie Theater’s Going Broke? From China’s AMC To Russian Majors, A Global Bloodletting

If you’re looking for whether or not to buy AMC or Cinemark, this isn’t the story. This is a big picture look at what the international movie theater industry is suffering through due to the COVID-19 pandemic, from Russian state banks taking a hammer to the country’s biggest movie theater chain, to China trying to stage a comeback.

The best news to come out of the movie theater industry of late is the fact that the Chinese are now going to movies again, and ticket sales are up like blockbuster level.

China’s Global Times bragged about it in February.

Still, AMC Theaters, now a household names because of the WallStreetBets vs Citadel (and other hedge funds) short squeeze trade, once owned by China’s Wanda Group, is cutting its losses. You wouldn’t know it looking at it share price.

The Wanda Group sold its majority position in AMC Entertainment, owners of the theater chain, according to a filing with the Securities and Exchange Commission recently. They made out well.

Wanda owns 9.8% of common stock in the cinema major and retains two seats on the board as of March 3, after it reduced its stake to 23.1% of AMC’s outstanding common stock and 47.4% of combined voting power of common stock by December 31 last year.

They have been thinking about filing for bankruptcy since October, Bloomberg reported, which is around the time the market went short.

This is not an AMC stock recommendation. For that you can read FinTwit and WallStreetBets. But, given the fact that America’s biggest city is finally opening its movie theaters, the medium term view for AMC is bullish.

For others, it may be too late.

Two smaller U.S. owned chains went belly up in the fall: Studio Movie Grill Holdings has gone bust and on March 3, Alamo Draft House, which owns 40 theaters nationwide, filed for bankruptcy.

Big chains throughout Latin America, where Cinemark is king, seem to be holding on for dear life. On March 4, they issued $405 million in short term senior notes, something for the institutional fixed income crowd, that pays 400 basis points over the 10-year treasury, or around 5.12%.

In Russia, companies are taking advantage of the crash and beating the living daylights out of each other. Bank Trust, a state-owned bank created to take the over toxic assets of private lenders, which procedure is not clear and not transparent, is making it nearly impossible for that country’s version of AMC and Cinemark to come back to life as Russia recovers from the pandemic.

Their theaters have been opened now for months.

Their big chains are known as Formula Kino and Cinema Park (Kinoseti is the corporate owner) and together they own over 70 movie theaters spread out over 30 cities, with around 25 million visitors a year. They’re the A-list in Russia.

Kinoseti and AMC are two global chains struggling through the pandemic; one Russian owned, the other Chinese. But only the Russian owned one is on the cusp of bankruptcy thanks to a dispute with Bank Trust.

Kick ‘Em When They’re Down

“A few years ago, we had Bruce Willis trying to save the reputation of Bank Trust. Trust is more and more like a collection agency instead of respected banking firm nowadays,” says Alexey Martynov, a political scientist and director of the International Institute of Modern States. “The question is why the Central bank of Russia even allows them to have a banking license behaving this way.”

The Russian movie house got a number of long-term loans totaling around $230 million pre-pandemic, dating back to 2017 from Otkritie Bank, one of the largest Russian lenders at that time, as well as Bank Trust. Both of those outfits are now pretty much run by the Russian Central Bank, so it would be like the Fed or the (People’s Bank of China) in charge of an AMC bailout. Otkritie Bank collapsed in 2017 after a multibillion hole in its balance sheet was revealed. Russian Central Bank bailed them out.  

Otkritie Bank assigned all its rights to its loan portfolio to Bank Trust. Bank Trust changed the payment terms of the loans, making them all due in full in 2022 instead of 2027 right at the time when Formula Kino and Cinema Park were forced into lockdowns.

Only Russia could have a nightmare scenario like this for a business in the middle of a pandemic. Someone, quick, make a movie about this.

“In fact, the only one activity of Bank Trust is a debt collector. It’s a kind of hypocritical of the Central Bank to allow this,” writes Dmitriy Tugushi, a senior partner of Kovalev, Tugushi and Partners law firm in an email interview. “There is no need for Bank Trust to act like a bank if you have this collection agency model at work. I don’t even see how this is legal.” He says that while one of Russia’s best movie theater companies gets put through the ringer at precisely the worst time, management is getting bonuses on par with that of Russia’s more well known investment banks — like VTB Capital and Alfa Bank.

Bank Trust seized around $6 million from Kinoseti’s bank accounts in January, a move that would make this the greatest short squeeze in Moscow if it had a NYSE ticker.

“If the company was already in trouble because of the pandemic, what’s the point in creating a nightmare for them now?” asks Leonid Krutakov, Associate Professor at the Financial University in Moscow, a public university. “You wonder who the collectors of this debt are really working for.”

Kinoseti filed several lawsuits against Bank Trust over the last few months to change the terms of the loans to pre-pandemic rates. That hasn’t gone anywhere yet, suggesting the Russian AMC is next to fall.

Kinoseti doesn’t impact the U.S. market or U.S. workers. AMC does. So does Cineworld from the U.K.

In October, the Los Angeles Times reported that Cineworld would temporarily close operations at all 536 of Regal’s U.S. theaters. Some 40,000 employees were laid off, most of them teenagers, but also theater management, which is a full time position.

“This is not a decision we made lightly, and we did everything in our power to support a safe and sustainable reopening,” Cineworld CEO Mooky Greidinger said a statement at the time. “We cannot underscore enough how difficult this decision was.”

Theater companies are turning the corner in the post-pandemic trade. AMC is underperforming Cinemark and may be the more stable bet. They will do really well once word of Brazil’s pandemic picture improving becomes clearer. Cinemark has a 30% market share there.

Back in China, despite all the hoopla by the Global Times, last summer the story was that 40% of China’s movie theaters would never open again.

The China Film Association made the prediction, saying many theater businesses were facing bankruptcy. China has an estimated 69,800 screens spread across 12,400 venues as of year-ending 2019. But CFA estimated last June that at least 5,000 venues, holding around 28,000 screens would be shuttered. It is unclear if their prediction came true.

Some good news, perhaps: Cinemex Holdings USA, the Miami-based parent of CMX Cinemas and owner of 41 movie theaters nationwide, emerged from Chapter 11 bankruptcy in December.

Movie theaters are in good, or rather, bad, company. According to Kiplinger in September 2020, retail, restaurants and oil and gas drillers were in even worse shape than movie houses blocked from opening due to Covid restrictions.