CJ CGV, South Korea’s largest movie theater chain operator, is expected to guarantee a minimum internal rate of return (IRR) to private equity firm Keistone Partners, which is participating in the cinema chain’s capital hike deal.

CJ Group is planning to raise 200 billion won ($184 million) for CJ CGV, industry sources said on Monday (December 7). Keistone Partners has received exclusive negotiation rights and entered into talks to acquire a 20% stake in the cinema chain in a deal which valued the company at 1 trillion won. Given CJ CGV’s high debt ratio, the deal is likely to be structured to include common shares and perpetual bonds.

The cinema chain is looking to raise funds to improve its financial structure amid ongoing spending due to restructuring efforts. It has 180 billion won worth of bonds and borrowings that will mature in less than one year. CJ CGV also has to secure 300 billion won for the total return swap deal it signed with Meritz Securities when it acquired Turkish Mars Entertainment.

“CJ CGV has been putting its utmost efforts into securing liquidity by issuing hybrid bonds and corporate bonds,” said industry source, adding, “The company could maintain its credit rating and raise additional funds more easily in the future if it could invite the second largest shareholder through the fundraising because it will help lower its debt ratio.”

The cinema operator is expected to provide protection against downside risk for the financial investor in response to the depressed state of the theater industry, which has been badly hit by the Covid-19 pandemic. CJ CGV will reportedly guarantee the principal and an IRR of 4–5% for Keistone Partners, soon to be its second largest shareholder. It is also expected to give the firm a possible exit route, such as a call option and a put option.

The financial investor could inject half the total investment amount into new shares and the remaining into mezzanine debts like perpetual bonds, and later convert mezzanine debts to shares if CJ’s restructuring process goes smoothly. Depending on the result of the restructuring, this deal structure is expected to reduce CJ CGV’s debt burden.

“The financial investor had to consider possible risks of losing its principal,” an industry source said, adding, “CJ and Keistone Partners will continue their discussion, but the deal is unlikely to be struck if principal and a certain level of returns are not guaranteed.” (Reporting by Ik-hwan Choi)