Canada: Canada’s Cinram Manufacturing Files In CCAA

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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John Birch
Erin Craddock
Bruce Leonard
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