mm2 Asia to move forward with $54m bond deal for cinema business

SINGAPORE - Embattled entertainment group mm2 Asia announced on Sunday that it has entered into a bond subscription agreement with brokerage UOB Kay Hian for a $54 million bond deal that is exchangeable for shares of mm Connect, which owns and operates the Cathay Cineplexes and mmCineplexes brands in Singapore and Malaysia.

"The successful signing of this exchangeable bond deal indicates the confidence and belief in the strong recovery and fundamentals of our cinema business and the mm2 group in general," said Mr Melvin Ang, executive chairman of mm2 Asia.

The group added that the bond deal does not preclude mm2 Asia from continuing to pursue an initial public offering (IPO) of its cinema business in Malaysia and Singapore, at a pre-IPO valuation of not less than $150 million.

This is provided the bond holder can exchange for more than 50 per cent of mm Connect shares at the enlarged share capital post-IPO without making additional investments.

The exchangeable bonds bear a coupon rate of 5 per cent per annum, payable on a semi-annual basis, with a tenure of three years.

Should the bond holder elect to exchange at the end of the second year, the bond holder will receive shares of mm Connect constituting 60 per cent of the share capital, at a base valuation of $90 million.

The exchange ratio is subject to adjustment, with the valuation potentially raised to $105 million if certain benchmarks are met.

The group said the benchmarks are in relation to mm Connect group's earnings performance before interest, taxes, depreciation and amortisation for the 24-month period ending Sept 30, 2024.

At the valuation cap of $105 million, the bond holder will invest an additional $9 million, or exercise the exchange right at 51.4 per cent of mm Connect shares.

Bonds that are not exchanged into mm Connect shares will be fully redeemed in cash. mm2 Asia may also choose to satisfy the $54 million redemption obligation by delivering the entire equity of mm Connect at the end of the tenure.

Additionally, the bonds are issued together with 250 million detachable warrants.

Each warrant will carry the right, for a period of five years from the issue date, to subscribe for one new share of mm2 Asia at the exercise price of 6.5 cents apiece.

If fully exercised, mm2 Asia will raise additional gross proceeds of $16.25 million.

The exercise price for the warrants represents an 8.9 per cent premium to the volume-weighted average price of 5.97 cents per share for trades done in mm2 Asia on June 16 - the market day the term sheet was signed.

The bond subscription agreement formalises the term sheet that was signed in June, when the group announced that it had attracted interest from an unnamed "long-term regional strategic investor".

In a bourse filing, mm2 Asia said the proceeds from the bond deal will be used to refinance existing debt.

This comes as its independent auditor in July flagged a material uncertainty that may cast significant doubt on the entertainment company's ability to continue as a going concern.

For the full year ended March, mm2 Asia reported a net loss of $35.8 million, narrowing from a net loss of $90.8 million the previous year.

Independent auditor Nexia TS Public Accounting Corporation noted that the group's current liabilities exceeded its current assets by $76.3 million as at end-March.

The auditor also noted that the group has borrowings amounting to $154.4 million that are due within the next 12 months from March 31.

In response, mm2 Asia said it had taken steps to address the going concern matter, including a new share placement and entering into the term sheet for the proposed issuance of exchangeable bonds and detachable warrants.

Trading in shares of mm2 Asia was halted before the market opened on Sept 23, pending the announcement. It resumed on Monday, with the shares up 0.2 cent or 4.2 per cent to five cents as at 11.27am.