Cinram International Income Fund (TSX: CRW.UN), a Canadian
company that is one of the world's largest providers of
multi-media products, has sought and obtained protection under the
Companies' Creditors Arrangement Act (CCAA). The
company proposes to sell its assets and businesses in the United
States, Canada, the United Kingdom, France and Germany to Najafi
Companies.
On June 25, 2012, the Cinram group obtained an Initial Order under
the CCAA in the Ontario Superior Court of Justice (Commercial
List), granting the companies a stay of proceedings from legal
actions by their creditors.
Once the Initial Order was granted, the companies applied in the
United States Bankruptcy Court in Delaware for recognition of the
CCAA proceeding as the "foreign main proceeding" for the
reorganization of the companies. Chapter 15 of the US
Bankruptcy Code allows foreign companies reorganizing abroad
to protect their assets from creditors and lawsuits in the
US.
Cinram operates a consolidated business in Canada, the United
States and Europe from its international headquarters in Toronto.
The group is one of the world's largest providers of
pre-recorded multimedia products and related logistics services,
with manufacturing facilities in North America and Europe. The
group produces DVDs, Blu-ray discs and CDs, and provides
distribution services for motion picture studios, music labels,
video game publishers, computer software companies,
telecommunication companies and retailers on a global basis.
Cinram's prospective purchaser, Najafi Companies, is a private
investment firm whose current portfolio companies include Direct
Brands, Actissia, SkyMall, Trend Homes and Snowflake Power. The
firm makes investments of up to $1 billion in companies across a
range of industries. Najafi proposes to purchase nearly
all Cinram's facilities for the manufacturing of
pre-recorded multimedia products and the provision of related
logistics services, digital media solutions and outsourced vendor
management inventory services in North America and substantially
all of the group's European business. The price was
undisclosed.
The transaction is subject to approval under the Investment
Canada Act and completion of other regulatory processes. The
sale is expected to close by early August, 2012, although the
transfer of some portions of the business may occur later.
The proceeds of the sale as well as those generated from all assets
excluded from the transaction will be used to repay
Cinram's senior creditors; they will not be distributed to
unitholders of the Income Fund.
In his affidavit to the Ontario court, John Bell, Cinram's
chief financial officer, said the DVD manufacturing industry was
characterized by a high degree of customer concentration, with
production levels and cash flows substantially impacted by the
timing and commercial success of the product releases of its
customers.
Cinram has signed exclusive multi-year contracts with several key
customers, but these are renewed at different times and do not
normally include volume commitments. Bell explained that the
economic downturn in the group's primary markets of North
America and Europe impacted its customers' discretionary
spending and adversely affected the entire industry. In 2011, US
consumer home entertainment rental and sell-through spending
decreased, while total spending on packaged videos fell 13%
compared to the previous year.
Bell said the physical CD replication industry continues to suffer
declines as consumers switch to digital distribution of media
products, which means that further consolidation and
rationalization can be expected.
Bell told the court that over the past four years, Cinram has
experienced significant declines in revenue and EBITDA as a result
of loss of customers, reductions in pricing, declining customer
order volumes and other factors. Revenue declined 28% in 2011
largely because of a major drop in sales in the group's core
pre-recorded multimedia products segment as well as lower game
revenues.
The group's net loss for continuing operations in 2011 was
$87.6 million, compared to net earnings of $15.7 million in 2010. A
major contributing factor to this shortfall was the loss of a major
customer that had delivered 32% of Cinram's 2009 total
consolidated revenues. Cinram also experienced major pricing
pressure from its major customers due to increased competition from
offshore manufacturers.
Bell said that since 2009 Cinram has strengthened its operational
and financial position, reducing its debt balance to approximately
$235 million by December 31, 2011. As at March 31, 2012,
approximately $233 million was outstanding under the group's
first lien term loan facility, $9 million outstanding under its
first lien revolving credit facilities, $12 million of letter of
credit exposure under the first lien credit agreement and $12
million outstanding under its second lien credit agreement.
Bell said that "in light of the financial circumstances of the
Cinram Group, it is not possible to obtain additional financing
that could be utilized to repay the amounts owing under the Credit
Agreements."
He added: "There is no reasonable expectation that Cinram will
be able to service its debt load in the short to medium term given
forecasted net revenues and EBITDA for the remainder of fiscal 2012
and for fiscal 2013 and 2014."
In a subsequent news release, Cinram stated that the court
restructuring process is not expected to affect Cinram's
day-to-day operations. "Cinram has access to the funding
necessary to maintain its operations and the operations will
continue without disruption during this period. Cinram will operate
its business in the ordinary course, including continuing to pay
its suppliers for all goods and services through the course of the
court restructuring process."
The group also said that the sale to Najafi "has the support
of members of the steering committee of lenders under Cinram's
senior secured credit facilities."
The Ontario court has appointed FTI Consulting Canada as monitor of
the CCAA proceedings.
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