A boisterous cheer erupted this morning during the Inter-Society Digital Cinema Forum (ISDCF) meeting when the proceedings were interrupted with news that Digital Cinema Implementation Partners (DCIP) had just officially announced they had received their financing. Indeed, DCIP published a press release stating that they had raised USD $660 million in financing. The funds will be used to roll out digital cinema in North America’s three largest circuits; AMC Theatres, Cinemark and Regal Cinemas.
As we previously reported when it was still a widely circulated industry rumor, DCIP’s financing will come in the form of USD $445 million in senior bank debt, USD $135 million in junior capital and USD $80 million in equity from the theatre chains themselves. JPMorgan assisted DCIP in raising the money which is being supplied by a who’s who of financial institutions including Bank of America, Barclays Bank, Citi, Credit Suisse, Deutsche Bank, GE Capital, Morgan Stanley and the Sumitomo Mitsui Banking Corporation.
There are sure to be tons of news stories generated by DCIP’s announcement, especially since it will allow media outlets to wave around the trendy “3D” phrase in hopes of attracting a few extra eyeballs. The reports will cite that nearly 14,000 screens throughout North America will be converted to digital by AMC, Cinemark and Regal who formed DCIP as a joint venture in 2007. (Truthfully, it’s probably more like 10,000 screens when all is said and done). No doubt they may even go so far as to pull press release quote from Travis Reid, DCIP’s CEO, which states:
“We are excited that with the continued support of our owners, studio partners and financial advisors we have completed this critical step in our process. Over the next few years, we’ll be aggressively implementing the transition to digital technology in theatres across North America. Guests will enjoy enhanced presentation and additional entertainment options at their favorite theatres as Exhibitors and content providers capitalize on the flexibility enabled by digital technology, including many upcoming releases using digital 3D. Having this substantial financial package and our studio partnerships in place, we’re pleased to launch this new era of technology to guests looking for an exceptional out-of-home experience.”
Check out the way Mr. Reid so adeptly snuck the word “capitalize” into that quote. Pretty slick. It’s funny though, because I always imagined his press release quote would read more along the lines of:
“Phew! That was harder then it needed to be and dare I say it’s about time we landed some money. Thankfully I will no longer have to answer questions every other week about when DCIP will be getting its financing.”
Since the mainstream media will take care of all the cheerleading about how 3D will soon be coming to a theatre near you, I figured it might be interesting to further explain the types of financing DCIP is getting. I mean what’s with all these terms like “senior debt” and “junior capital”? Does the senior debt have offspring named after it? And does the junior capital have a father with the same name?
In fact, these phrases have absolutely nothing to do with generational titles, though they do relay information about the financial structure of the loans and debt DCIP has just taken on. Actually, JPMorgan raised DCIP’s money using a very traditional financial model that includes priority bank loans, secondary bridge loans and equity from principals. Let’s see if we can’t break it down to a level that can be understood by. . . humans.
JPMorgan helped DCIP get bank loans from the above mentioned financial institutions. But the funny thing is when banks loan you USD $445 million they tend to want to be paid back. To insure they get paid back in the event something should go horribly wrong (which we all know could never happen in digital cinema) banks almost always issue senior debt. This type of debt financing obligation holds a legal claim to the borrower’s assets (collateral) and must be paid back before all other debt obligations or debt claims against the borrower (which in this case is DCIP). Translation – if DCIP goes belly up, the banks will own a whole bunch of d-cinema servers, projectors and IT gear which they can sell off to get paid back. If there is any money left over, other interested parties can receive payments.
In reality, the banks get paid back in short order. They take the secured loans they’ve just issued to DCIP and sell them off as debt securities to investors. They sell the loan to someone else. . . or several someone elses. One way investors know the risk level of a debt investment is through the use of a bond credit rating issued by a reputable ratings firm such as Fitch or Standard & Poor’s. DCIP’s senior debt is rated Baa2 by Moody’s which is defined by the firm as:
“…subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.”
Junior capital allows a company to sell shares to the public before they even have a business so long as the company’s founders contribute at least USD $100,000. Such financing can either come in the form of debt or preferred stock. Junior capital is often referred to as subordinated debt because it is paid back after senior debt and before common shares. Another term for this type of capital is, appropriately, mezzanine financing. Such capital structures are commonly employed by small companies and the financing is raised through private placement. Blackstone raised DCIP’s junior capital from third parities.
In the event of a bankruptcy, junior capital is less likely to be paid back in full after senior debt obligations are met. Because of the increased risk, investors expect a higher return on their investment making the cost of capital more expensive (read: higher interest rate).
One way to look at junior capital in the financial structure of a company is as a bridge loan. However that bridge must lead to somewhere and in most instances it leads straight to a principal’s own equity investment. Banks and investors want to know that those asking for the money have some skin in the game. With DCIP, they can be assured that AMC, Cinemark and Regal are contributing a combined USD $80 million. What is not being stated all that clearly is that the existing d-cinema deployments, which were paid for entirely by DCIP’s exhibitors, is going to be counted in that USD $80 million. Meaning, they’ve likely already made their contribution with their current install base.
Whether the cost of 3D technology is included in the USD $660 million is still unknown, however as I’ve highlighted previously, it is unlikely given that virtual print fee agreements tend not to include 3D. If that’s the case AMC, Regal and Cinemark will be left to foot their own 3D bill.
Now if all of this has explanation and financial terminology has got your head spinning so fast you feel there’s no way you’ll ever understand it, take heart, as that is the reason we chose to work in the motion picture industry rather than become bankers like our parents would have preferred. Besides, Mr. Reid and his DCIP team have a solid grasp of all these capital concepts so we can all thank them for letting us breath a collective sigh of relief that digital cinema will soon be as common in movie theatres as DVD players are in our homes. . . oh wait second, that could be taken the wrong way!
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