Cineworld backs down in dispute with lenders over interest bill

Cineworld has backed down in a bizarre spat with its lenders over a disputed interest bill, after the London-listed cinema operator initially refused to pay additional costs ostensibly stemming from an error in its loan documents.

The company, which has recently drawn scrutiny for approving a £65m executive bonus scheme, had clashed with lenders over a small increase in the interest rate on billions of dollars worth of loans, which Cineworld and its advisers said had been unintentionally increased during negotiations with creditors in November.

While Cineworld refused to pay the additional interest when it first became due in December, it has now been settled, according to two people familiar with the matter. They added that the additional interest costs for the company could total tens of millions of dollars a year. 

Cineworld declined to comment.

Cineworld’s legal advisers at Kirkland & Ellis have argued that the additional interest costs were mistakenly introduced into the company’s loan documents, according to people familiar with the matter. Kirkland declined to comment.

During negotiations for a $450m rescue loan in November, lenders were granted an interest rate increase on the group’s existing debt of more than $3bn. This was because a so-called Libor floor, setting the floating interest reference rate at a minimum of 1 per cent a year, was inserted into the loan agreement.

“It’s quite simple: they signed the loan document, so they’re liable for the interest,” said one of the company’s lenders, who added that Cineworld would have found itself in default on the loan if it had continued to hold out.

The group, which operates cinemas across 10 countries, has been forced into a precarious position by the pandemic as lockdowns have forced cinemas to close. It is also facing a costly court case after it abandoned an attempted takeover of the Canadian cinema chain Cineplex in June.

Cineworld and its advisers initially appealed to Barclays, which acts in an administrative function as the loan’s “agent”, requesting a correction of the supposed error.

But people involved in the dispute said the bank refused because it said it needed unanimous approval from lenders, which were unwilling to grant it. Cineworld’s advisers disagree with this interpretation and may challenge it in future, they added.

Barclays declined to comment.

While agents are intended to play the role of neutral arbiters between borrowers and lenders, the increase in disputed restructurings over the past year has made the job more contentious. Notably, Citigroup found itself at the centre of a spat when it accidentally paid $900m to a group of aggrieved creditors of the cosmetics group Revlon last year.

Kirkland has become the world’s highest-grossing law firm and is on track to generate record annual revenue after a bumper year for its strongest areas — private equity, restructuring and litigation.

While the dispute is unusual, there have been similar clashes between companies and creditors previously. A slip-up by “magic circle” law firm Allen & Overy in 2016 saw Guy Hands’ Terra Firma unintentionally pledge a group of care homes to lenders. An English high court ruling later allowed this “serious error” to be rectified.

This ruling does not serve as a precedent for Cineworld’s dispute, however, because the company’s loans are written under New York law. 

While the recent investor euphoria for shares in heavily shorted companies has buoyed Cineworld’s stock price this year, people involved in the company’s negotiations with creditors say the business came close to filing for bankruptcy in November.

The company had a team of lawyers and advisers preparing to file for Chapter 11 in US courts, but were able to avoid doing so after lenders agreed to provide the $450m of additional funding.