Cinedigm issued several press releases this month, two of which deserve discussion.
Cinedigm’s announced a “digital distribution agreement” with Warner Bros, bringing confidence to those who may not have been convinced that Cinedigm’s digital cinema deployment effort has the support of all studios. But the very idea of an agreement with WB raises the eyebrows of other studios, many if not all of whom have a “most favored nations” (MFN) clause in their own virtual print fee (VPF) agreements with Cinedigm. Notably, those agreements are termed “deployment agreements,” not “distribution agreements.” To be fair, however, Cinedigm generally avoids the term “deployment agreement” in press releases. There’s always danger in reading a lot into a few words, but there certainly is reason to speculate about the nature of this agreement.
The long standing issue for Warner Bros is that the VPF is tied to the cost of film prints, and WB, with its sizeable market share for movies, presumably gets the lowest film print cost among all studios. WB struggles with the idea of committing to a VPF price that in essence erases the benefit it currently enjoys with low film prices. But are they really opposed to paying VPF’s? Certainly, there were no reports that Harry Potter didn’t play on Cinedigm Phase 2 screens, however small in number these may be. And per its MFNs, Cinedigm would be in a heap of trouble if it paid VPFs out-of-pocket on WB’s behalf.
Stepping back a bit, there is a fundamental reason why deployment agreements exist: so that banks can fund such deployments. The deployment agreement guarantees the conditions that generate the cash flows for retiring equipment loans. It used to be conventional wisdom that banks were happy with 4 or 5 of the majors signed, so that signing a fundable agreement with all six was not so important. DCIP, for example, has yet to sign an agreement with Warner, yet it’s moving forward with the syndication of its equipment bond. If the lack of signed agreements with all 6 majors turned out to be an impediment to Cinedigm’s access to funds, then perhaps a different kind of agreement other than a deployment agreement would do the trick.
So while there isn’t enough information available to speculate on the details of Cinedigm’s agreement with Warner Bros, there is sufficient reason to speculate that this “distribution agreement” is different from those signed with other studios. Whether this leads to harm to Cinedigm, its exhibitors, or its banks remains to be seen.
Whatever hurdles Cinedigm faces in obtaining access to funds, it appears to be succeeding in eliminating them. The company announced letters of commitment for $100M in 5-year senior credit facilities from GE Capital and Paris-based Société Générale. While this is a good start towards a two thousand screen deployment, the junior or subordinated debt required to complete these deals was not mentioned in the release.
When studying cash flow of virtual print fee financing, it turns out that 5-year loans cannot be paid down with only the cash received from virtual print fees. Additional cash is needed, which can be obtained through loans backed by exhibitor assets, deployment entity assets, or through unsecured junior debt supplied at a high interest rate. In a recoupment-based deployment agreement, studios are generally willing to pay VPFs for up to nine or ten years so that all forms of debt associated with the equipment, not just the senior 5-year loan, can be repaid.
For Cinedigm, or any deployment entity relying on a senior credit facility, the secondary debt requirements must be met to engage in deployments. If junior debt is pursued, the risk to Cinedigm is that the interest rate must be reasonable for recoupment to take place within nine or ten years. Hopefully, the recent agreement with Warner Bros will help in this regard.
The loan commitment press release was also the coming out party for Adam Mizel, Managing Principal at Aquifer Capital Group, who is Cinedigm’s second largest shareholder. Adam has been a member of Cinedigm’s board since March, and more recently was appointed Cinedigm’s Chief Financial Officer and Chief Strategy Officer. His quote in the press release precedes that of CEO Bud Mayo.
While both announcements were good news for Cinedigm and for exhibitors seeking to obtain digital cinema equipment, there are devils that may still lie in the details.