Asia Cinema Theater Business Holding Company Convertible Preferred Stock Collateral
5 Years of Continuous Shareholding Following Hong Kong IPO Failure
Company Repeatedly Faces 'Capital Erosion → Insolvency' Due to Accumulated Losses
No Listing in Sight, Collateral Loan Refinancing Continues
A consortium of MBK Partners and Mirae Asset Private Equity (Mirae Asset PE) secured 124 billion KRW in funding using shares of CGI Holdings, the Asian holding company of CJ CGV, as collateral. CGI Holdings had planned to exit by selling its shares upon a successful IPO in Hong Kong, but due to deteriorating performance and other factors, the plan fell through, resulting in continued ownership of the unlisted shares. The funds raised through this loan were used to repay existing stock-collateralized borrowings. Due to ongoing losses, there is still no clear timeline for when the shares can be exited.
According to the investment banking (IB) industry on the 18th, Asia Cinema Group Ltd. secured a foreign currency loan worth 89.7 million USD (approximately 124 billion KRW) with Daishin Securities as the lead manager. The loan has a two-year maturity but allows for early repayment starting one year after issuance. If Asia Cinema Group fails to properly repay the principal and interest, CJ CGV, a CJ Group affiliate operating movie theaters, will bear the ultimate repayment responsibility.
Asia Cinema Group is a paper company established in the Cayman Islands, a well-known tax haven. It was reportedly set up by MBK and Mirae Asset PE to acquire convertible preferred shares (CPS) of CGI Holdings. CGI Holdings is the Asian holding company of CJ CGV, owning and managing multiplex cinemas in China, Vietnam, and Indonesia.
Daishin Securities, which managed the funding, provided the foreign currency loan to Asia Cinema Group through a special purpose company (SPC). Simultaneously, the SPC issued securitized bonds backed by the loan principal and interest as collateral to raise the loan funds. During this process, the SPC also entered into a foreign currency swap (CRS) contract to hedge against sharp increases or decreases in the repayment amount of the dollar-denominated loan principal and interest due to exchange rate fluctuations.
MBK and Mirae Asset PE formed a consortium in 2019 to acquire 28.57% of CGI Holdings’ CPS for 333.6 billion KRW. CGI Holdings, which initially operated cinema businesses in China, merged its Vietnam and Indonesia subsidiaries to serve as CJ CGV’s Asian cinema business holding company. CJ CGV had promised an IPO in Hong Kong by 2023 while receiving investments from financial investors (FIs).
However, the COVID-19 pandemic severely impacted the cinema business’s performance, making the IPO difficult. Except for one Vietnam subsidiary, CGI Holdings and its subsidiaries recorded net losses in 2021 and 2022. Even after the pandemic’s endemic phase, losses continued through 2023 and the third quarter of this year, slowing the recovery pace and ultimately causing the IPO to fail within the set deadline. Due to accumulated losses, the company was in a state of capital erosion as of the end of last year.
If CGI Holdings fails to go public, CJ CGV can exercise a call option to repurchase shares. However, CJ CGV’s financial strength and condition have also deteriorated, making it difficult to buy back shares from FIs. Despite this, due to ongoing exit pressure from FIs, CJ CGV exercised call options to repurchase some shares. The shares repurchased in the third quarter alone amounted to 8.7%. As a result, CJ CGV’s stake in CGI Holdings increased to 82.52%, while FI holdings decreased to the 17% range.
Recently, to recover from capital erosion, CGI Holdings has been conducting consecutive capital reductions without compensation. By offsetting accumulated deficits with capital surplus generated from these reductions, the company can reduce its capital and avoid capital erosion. Last year, a 15% capital reduction without compensation was carried out, and another 37.49% reduction is planned for December this year.
An IB industry insider said, "Since a company in a state of capital erosion cannot proceed with an IPO, it appears that capital reductions are being continuously pursued," adding, "FIs that have not sold their shares to CJ CGV have no choice but to continue holding their shares and keep rolling over the loans they borrowed to purchase those shares."
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