Cineworld is set to avoid bankruptcy for the second time in two years, lenders say, although the British film group faces a nearly $1 billion payout that exceeds its market value for pulling out of a deal to buy its Canadian rival Cineplex.

The world’s second-largest cinema operator has appealed the court which awarded damages, but investors in Cineworld debt expect the two companies to reach a deal for a significantly lower amount, even in the event of a ‘failure.

Indeed, if Cineworld were pushed into bankruptcy by damages, Cineplex would be near the bottom of the queue for creditors to pay, several lenders told the Financial Times.

The group’s debt stood at $4.6 billion at the end of June 2021, according to its latest filings.

The legal row between the two companies comes as cinema exhibitors around the world battle to resurrect revenue that was wiped out during the worst of the coronavirus pandemic.

“Strategically, Cineworld is in a pretty good position even if they face this huge judgment,” a lender told the company.

Cineplex’s claim stems from Cineworld’s cancellation in June 2020 of a deal struck six months earlier to buy the Canadian group for $2.3 billion. The two companies later sued for breach of contract, and a Canadian court awarded Cineplex CA$1.23 billion ($950 million) in damages in December 2021, more than the current market value of £530m from the London-listed company.

But because of the way the deal was structured, Cineworld was able to leverage its already high debt load to pressure Cineplex into accepting a lower payment.

Cineworld created a Canadian legal entity to complete the acquisition. As the deal fell apart, the legal entity remained as “an empty box” with no assets, according to the lender, so Cineplex’s claim lies with the entity’s holding company , Cineworld Group PLC.

Partly due to lockdown closures pushing Cineworld to raise emergency funding, and partly due to its existing debt load, the company is already at the mercy of billions of dollars in loans to asset managers including Eaton’s. Vance and Credit Suisse Asset Management.

These loans are secured by the company’s assets, which are generally paid first in the event of bankruptcy. “In the event of bankruptcy [Cineplex’s] the claim will literally get next to nothing,” said one struggling debt investor.

“As a senior creditor ourselves, we are not going to let a junior claim be paid before us,” said another loan holder. “There’s the idea that Cineplex gets the joke too.”

Cineplex declined to comment on its position. Cineworld also declined to comment.

Last week, Cineplex filed a cross-appeal against Cineworld’s challenge to the court’s decision. The Canadian group argued that if the initial damages are overturned, the court would have to consider a list of other claims ranging from C$714 million for liabilities that would have been covered by Cineworld if the deal had gone to C$1.3 billion for Cineplex’s loss of compensation. security holders.

Nonetheless, any further claims would remain subordinate to secured creditors in the event of bankruptcy, giving Cineplex little advantage in forcing Cineworld down this path.

“Any payment cascade in an insolvency or restructuring situation would require addressing the priority of different claims,” said Abigail Klimovich, analyst at S&P Global Ratings. “The definition of collateral is quite specific in terms of a claim for secured debt holders. Any other claims that do not have specific access to collateral would rank below secured debt creditors.

Cineworld, which operates in 10 countries, has reported positive signs for cinemas if it were to survive this latest bankruptcy threat. He said that with the release of Spider Man: No Coming Homewhich became the first film to gross more than $1.5 billion at the box office since the start of the pandemic, revenues had reached 88% of 2019 levels at its 751 theaters by December.

But Cineworld is not off the hook. Klimovich said a further rise in Covid-19 cases affecting people’s willingness to go to the cinema or delaying the release of blockbuster films could further hurt society as it seeks to pay off debt.

In a bid to bolster its cash position, Cineworld said on Tuesday it had entered into negotiations to delay payment of a separate $170 million settlement due to shareholders of Regal, the U.S. movie network it bought in 2017.

“They need to address their acute liquidity issues and their capital structure, and then there’s the litigation issue, but that’s not the main issue right now,” Klimovich said.