Hedge funds set to cash in on Cineworld woes

Watch: Thousands of jobs at risk as Cineworld plans closure of all UK sites

Hedge funds are in line to reap millions from the collapsing share price of Cineworld (CINE.L).

Filings show that Cineworld is the most “shorted” stock on the London Stock Exchange — meaning hedge funds and other high-risk investors have bet its share price will fall.

Shorting is where hedge funds borrow stock in a company and then sell it on the open market. The hope is that the price falls by the time they are due to return the stock, allowing them to buy it back at a lower price and pocket the difference.

Cineworld’s stock collapsed as much as 56% on Monday after confirming plans to shut all over 700 branches in the US and UK. The chain has blamed the delayed release of blockbusters like the new James Bond film, which it said made operating its cinemas unviable.

READ MORE: Cineworld shares tank as 45,000 jobs put at risk

Around 8.5% of Cineworld’s stock is currently on loan to short-sellers. Short interest in the company has been building steadily since early July, when around 2.5% of the stock was shorted.

London-based hedge fund Adelphi Capital is set to reap the biggest windfall from the collapse, with a short interest worth just over 2% of Cineworld’s total stock.

Breakout Point, a subscription service that tracks European short positions, said on Twitter Adelphi had “one of the most Covid-focused short portfolios.” The fund is also shorting Premier Inn-owner Whitbread (WTB.L), among others.

Other hedge funds in line for a payouts from Cineworld’s collapse include Citadel, Jericho Capital, Tekne Capital, and BlackRock (BLK).

Calculating the exact windfall is difficult given stakes were built up over time, meaning different share prices were paid as it was built up. Hedge funds must also pay fees to rent the stock, which eats into returns.

Russ Mould, investment director at stockbroker AJ Bell, said the share price collapsed theoretically could have netted £14m for hedge funds based on Friday’s price.

Watch: Cineworld shutting down operations, slashing jobs

But he cautioned: “As with any investment, it’s the price/valuation at which you transact which is the ultimate arbiter of returns.”

“Cineworld was first heavily shorted in spring 2018 as the Regal Entertainment deal closed,” Mould said.

“Bears must have taken the view that taking on piles of debt to buy a cinema chain at a time when streaming of content via Netflix, Amazon and others was a big risk, especially in a business where a few flop movies could in theory affect box-office takings.”

Neil Wilson, chief market analyst at Markets.com: “Cineworld was a little bloated before the pandemic struck. Net debt of over $8bn [£6bn] – thanks mainly to two large leveraged acquisitions in recent years — and a market cap of $540m by the close on Friday left Cineworld in a difficult position to refinance if punters were not coming through the doors.

“Without the Bond franchise to draw people in there was little option – closing its theatres at least gives it a chance to preserve cash and wait for things to improve. Refinancing by some sort of rights issue seems inevitable.”