AMC Entertainment: Prepare For The Worst (NYSE:AMC)


AMC Entertainment (AMC) is in a desperate situation. During the normal times, the company failed to make any meaningful profit and it was constantly generating a negative FCF. Considering that we are in the midst of a pandemic, it’s highly unlikely that AMC will be able to improve its situation in the current environment and create value. While the company plans to reopen its theaters on July 30, its business will not be able to return to normalcy anytime soon. As the United States continues to see a surge in active cases of COVID-19, there’s a high risk that the reopened theaters could be closed once again by the government officials to contain the virus. As a result, AMC will not be able to meet its obligations, since it has lost its revenue streams, and it will be forced to file for Chapter 11. While the recent note restructuring deal helped AMC to win some time, we still believe that bankruptcy is imminent since the company is expected to be unprofitable for the next couple of years. For that reason, we hold a short position in AMC.

Bankruptcy Is on Its Way

With more than 1000 theaters inside the United States, AMC is one of the biggest movie theater chains in North America. Despite its large size, the company wasn’t able to show a meaningful performance in the past, as its revenues were not growing and theaters were constantly losing money. Thanks to the low-interest-rate environment, AMC has been constantly borrowing cheap debt to aggressively expand all around the country, but it did not lead to any growth. The poor performance resulted in a depreciation of its share price and in the last five years, AMC’s stock declined by nearly 90%. At the same time, the theater chain accumulated too much leverage and at the beginning of June, it said that there’s a risk that it will not be able to meet its obligations and will be forced to declare bankruptcy.

The Q1 earnings results showed how bad things inside the company really are. In the first three months of the year, AMC’s revenues declined by 21.5% Y/Y to $941 million, while its non-GAAP EPS was -$2.22. The total net loss was $2.18 billion. At the same time, AMC has one of the worst operating and net margins in the industry and its stock trades at a negative EV/EBITDA ratio.

Source: Capital IQ

Right now AMC plans to reopen most of its theaters by the end of July. However, considering the surge in new active cases inside the United States, that timeline could be shifted once again, as authorities could start another round of lockdowns to contain the virus. California already did so and other States could follow. China also recently decided to close its movie theaters for the second time, as the country fears the beginning of the second wave of the spread of the virus, which could be even more devastating than the first one. Considering this, movie theaters along with companies from the travel industry will continue to be risky investments until the pandemic is over.

With $10.5 billion in debt at the end of Q1 and only $299 million in cash, AMC’s balance sheet is overleveraged and it’s unlikely that the company will be able to repay or restructure all of its outstanding debt. While recently it was announced that AMC has reached a deal with some bondholders to decrease its outstanding debt by $460 million to $630 million, its balance sheet is still overleveraged.

We would also not view the recent $300 million financing deal to be beneficial to the shareholders. It’s true that without the influx of liquidity AMC would’ve been bankrupt already, but the chances of it filing for Chapter 11 are still high. While the private equity firm Silver Lake, which has a board seat in AMC, has agreed to provide a $100 million senior loan to the company, it also was able to swap its holdings into first-lien debt as a part of the deal. This means that in the case of a bankruptcy, it’ll be the first in line to receive AMC’s assets.

At the same time, we don’t think that AMC will be able to profit from the release of the new blockbuster movies that are scheduled for late 2020 and early 2021. During normal times, AMC has been losing money and generating negative FCF. In Q2 alone it will have almost no revenue, as most of its theaters were closed during the period and it was operating in a zero-revenue environment. Considering that it’s nearly impossible to make any money at all in the current environment and the company still needs to pay interest to service its debt, we don’t see how AMC will be able t o recover from the current situation. The only way the company could continue to expand and create shareholder value in the future is by declaring bankruptcy, restructuring its debt, and wiping out all the current shareholder equity. As analysts forecast AMC’s EPS in 2020 and 2021 to be -$19.62 and -$3.11, respectively, we believe that in its current state the company will not be able to successfully service its debt. For that reason, we decided to short its stock, as we believe that AMC will have no other option but to file for Chapter 11 this year.

Disclosure: I am/we are short AMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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AMC reaches agreement with bondholders to reduce debt by up to $630 million By Reuters


© Reuters. FILE PHOTO: The outbreak of the coronavirus disease (COVID-19) in Burbank

(Reuters) – AMC Entertainment (NYSE:) Holdings Inc said on Monday it had reached an agreement with bondholders to reduce its debt by up to $630 million, as the theater industry suffers from the impact of COVID-19 pandemic.

Major theater operators in the United States have laid off thousands of employees and borrowed funds to stay afloat amid weeks-long lockdowns, which may be extended as infections continue to surge.

AMC, the world’s largest movie theater operator, said the deal with a group that holds about 73% of its $2.3 billion in senior subordinated bonds would reduce its total debt by between $460 million and $630 million.

The company added it had raised $300 million in new first lien financing, helping its shares rise more than 5% in premarket trading.

AMC in June had delayed the opening of its theaters to the end of this month as Hollywood puts off movie releases due to surging coronavirus cases, while major markets such as Los Angeles pause on deciding when theaters can reopen.

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AMC Entertainment To Avert Bullet


We seem, more and more, to be moving from the economy having a liquidity problem to one in which the problem becomes one of solvency. I have written about the movement of companies into this latter situation and how the shutdown in the economy has started to really hit in terms of a slowdown in cash flows.

One company experiencing such difficulty is AMC Entertainment Holdings Inc. (NYSE:AMC), a major cinema chain, which has suffered a severe shortage of cash flow due to the shutdown of movie theaters because of the spread of the coronavirus pandemic. This has forced the company to the edge of bankruptcy.

But some investors still believe that the current organization is salvageable. Bankruptcy may not be the result in every case.

The Role Of Private Equity

Private equity is going to be a big player in how some of the current bankruptcy situations work out. The situation is not one of liquidity, for private equity funds seem to have an ample amount of cash to play around with. The issue appears to be more along the lines of the future of the companies being considered.

As I have written earlier, private equity funds appear to have a record amount of cash on hand – $1.45 trillion, as a matter of fact. And note that this total does not include venture capital money. But these funds are not for everyone.

Private equity funds own a lot of companies that have gone into bankruptcy or are on the edge of going into bankruptcy. So, even though all this money is on hand, the private equity funds are not just jumping up to save everything they have a share of.

It appears, I argued, that:

“The argument is that the money held by the private equity funds are for new investments, and are not directed for use in ‘shoring up’ companies they have already bought.”

It seems as if:

“investors in private-equity funds are rarely enthusiastic about new money being spent to rehabilitate struggling businesses…”

Managers are to “support only the most promising companies…”

AMC Appears To Be Different

Private equity fund Silver Lake Group LLC, which has a representative on the AMC board and holds $600 billion in convertible bonds, has moved into the position of building a deal to get AMC though its current funding difficulties.

The deal would require bondholders to provide $200 million in the form of a senior loan, and would also require them to swap their unsecured debt at a discount rate for new, second-lien debt. The $600 million in convertible bonds would be swapped for first-lien debt.

This offer, however, has not gone unchallenged. Asset managers Apollo Global Management Inc., Davidson Kempner Capital Management LP and Ares Management Corp., who are also senior lenders to AMC, have submitted a counterproposal. A condition of this offer would be the blocking of Silver Lake from swapping into the top-ranking debt. So, there are two sources challenging for the right to take AMC forward.

The reason for this seems to be that AMC is in the group of “most promising companies,” and its difficulties have arisen solely due to the deficient cash flow coming from the shutdown of its operations. AMC is now planning to reopen the majority of its theaters in the US on July 30, and the financial arrangements will allow the company to stay in business until the reopening takes place.

The date of choice is due to the fact that the movie chain will have two major films to release at that time.

The Macro Picture

AMC, as a company, seems to be well-run. In other words, several private equity companies believe that it is a “most promising company.”

More important to me at this time, however, is what the AMC situation is saying about how troubled companies in the current environment are being handled.

Private equity firms have let other firms go into the bankruptcy process. These other situations include Hertz Global Holding, Inc., Neiman Marcus Group Inc. and J. Crew Group Inc., among others. The crucial difference between these companies and AMC is that these other companies entered the recession in trouble carrying a massive amount of debt. Their futures, in a real sense, were not that “promising,” even though they all carried a “respected” name.

So, in looking at the macro picture of the economy, we see that the pileup of bankruptcies is just beginning. But not all troubled companies will go into bankruptcy. As far as individual companies are concerned, we need to look at each separate case. However, for the economy as a whole, bankruptcies are going to increase.

This means to me that the Federal Reserve System, sooner or later, is going to face a solvency problem that will not be resolved by the central bank providing more and more liquidity resources. Bankruptcies are going to increase and exceed those which took place during the Great Recession.

This pile-up of bankruptcies is going to be a substantial drag on the economy as a whole, extending the depth and length of the recession.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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AMC Entertainment: Difficult To See How Value Flows To The Equity (NYSE:AMC)


Pro Forma Capital Structure

AMC is offering ~$2.4 billion subordinated notes to exchange into a 12% Cash/PIK second-lien (2L) notes at ~52 cents on the dollar. Concurrently, AMC is letting the Silver Lake 2.95% convertible notes up-tier into a first-lien (1L) position, sharing the collateral with AMC’s credit facilities and the newly issued 10.5% first-lien notes. As a pure tactic to get more noteholders to accept the exchange, the exchange is structured in such a way that there’s a $640 million cap to the face value of the 2L notes, but if the exchange offer is accepted by the majority of each of the four subordinate notes, the cap will be removed so that every subordinated notes will be exchanged to the new 2L notes.

This is a pure tactic because the pro forma capital structure with the cap in place doesn’t solve the leverage and liquidity issue nearly enough. Total debt is reduced by ~$90 million ($5,287,200 – $5,197,235) with interest cost saving just over $70 million a year (because AMC doesn’t have to pay coupon on roughly half of $2.4 billion subordinated notes). However, if all ~$2.4 billion Subordinated Notes accept the exchange, ~$600 million debt will be shaved off the balance sheet, and that comes with an interest saving of ~$144 million a year.

Source: 8-K

I expect the subordinated noteholders to negotiate with AMC for better considerations. This process could drag on for a while as the near-term liquidity profile of AMC looks decent after successfully completing the $500 million 10.5% 1L note. The May interest payments were made and I expect the June 15 payments will be made as well. More importantly, the 10.5% 1L noteholders need AMC to stay out of bankruptcy for at least 90 days to not have their lien challenged by the junior creditors (preference avoidance). Some obvious additional considerations would be:

  • a higher coupon rate
  • a higher principal amount of the new 2L notes
  • up to 19.9% of the AMC equity (under this threshold doesn’t require shareholder approval)

However, if the process drags on and AMC decides to file Chapter 11 to enforce a balance sheet restructuring, the subordinated noteholders will be in a very weak position, so I’m not sure how much bargaining chips they hold. Assuming the existing offer is fully accepted, AMC will have $3.4 billion in 1L debt, $1.2 billion in 2L debt, and $95.1 million in finance lease obligation, or in total $4.7 billion debt. However, the cash interest cost will be cut down from ~$223 million to $138 million (PIK notes interest saving offset by the 10.5% higher coupon).

Monthly Cash Burn

As an outsider looking in, I can only try my best at estimating the monthly cash burn. I basically took the FY2019 numbers and made some adjustments. With my very rough estimation, I believe AMC has the liquidity to sustain itself for 9 months, which takes us at least until the end of 2020.

  • Rent is easy to model – AMC is not paying a dime.
  • For theater opex, I assume 90% of the cost is wages to hourly workers who are sent home quickly.
  • For corporate SG&A, I assume a 25% reduction from a combination of eliminating bonus, cutting discretionary spending and salary increase freeze.
  • Maintenance capex is cut by 95%.
  • 95% of the accounts payable will be paid throughout the year (it’s hard to avoid paying these and stay in business)
  • pro forma interest expense of $11.5 million a month assuming the exchange is completed.

Source: FY2019 10-K, Author’s Estimation

Valuation – Accrued Liabilities & PIK Interests Take Value Away from Equity

Pro Forma Debt – In order to calculate the equity value, I think it’s necessary to account for all the accrued rent liabilities and the additional principal that’s going to be created by the PIK interests. 8 months of rent is about $645 million and PIK-ing ~$1.2 billion of principal at 12% for a year creates additional ~$142.8 million principal of the 2L notes. Adding these two items to the debt stack results in ~$5.5 billion debt obligation. Also let’s assume AMC is able to operate on a cash-flow-neutral basis in 5 months, this means ~$392.0 million of the $718.3 million cash at the end of April will be burned, resulting in pro forma cash position of ~$326.3 million. The thinking behind the 5 months is that 5 month starting at the end of April takes us to the end of September, which is considered to be one of the “dump months“, and the business picks up from there.

Source: 8-K, Author’s Estimation

Sustainable EBITDA – I largely agree with the EBITDA add-backs except for the stock-based compensation expense should be accounted for somehow – either treat them as equity dilution or as cash costs. I choose to treat them as cash cost. AMC acquired Nordic Cinema in 2017 so $822.5 million doesn’t reflect the true earning power, but since the acquisition completed early in the year, I won’t make any adjustments for it. M&A-related cost seem recurring but I’m going to assume they can just stop buying theaters.

Source: Company FY2019 10-K

Going-Concern Valuation – movie theaters generally trades in the range of 6.0-9.0x EBITDA multiple. Below I value AMC with the simple average of the 3 years EBITDA as the sustainable EBITDA, and the pro forma net debt calculated above. The enterprise value backs into an EV/Screens value between $450k to $650k, which is inline with industry average. As you can see from below, absence of major liquidity issues and the world normalizes to pre-COVID, AMC equity can double or triple from where it’s trading right now ($5.91/share) or be completely wiped out. However, these two conditions are hard to satisfy unless the best-case scenario plays out. And even in this best scenario, AMC maintains an overly leveraged balance sheet (net debt/EBITDA 6.0-6.5x).

Source: Company FY2019 10-K, Author’s Estimation

Restructuring Scenario Value Waterfall

Here I’m contemplating an in-court restructuring scenario and “see who gets what” in terms of distributing the plan value. I start with the EV calculated above and subtract the assumed $650 million DIP financing (to cure the defaults with landlords so the business can operate normally) and $120 million administrative cost. Including the $326.3 million cash on hand, this results in a distributable value between $5.3-7.6 billion.

The only other complicating factor is that the debt must be kept to a manageable level (here I assume 2.0-3.0x Debt/EBITDA) so AMC is unlikely to fall into financial hardship again. The allowed debt is first given to DIP lender (assume DIP rolls into a regular RCF on exit) and then to 1L creditors as part of the 1L recovery value, and the rest of the 1L recovery is in the form of the new equity in AMC. In the base scenario, $1,357.5 million of debt is given to 1L creditors ($2,082 million total allowed debt subtract $650 million of DIP financing and $95 million of Finance Leases) along with 50.5% of the new AMC equity. Note that 1L is fully covered in all three scenarios (although with a different mix of debt and equity).

Since the DIP and 1L took up the entire allowed debt capacity, 2L creditor’s recovery is entirely in the form of new equity. Depending on the situation, 2L will end up owning between 28.2% to 30.2% of the new equity. 2L is fully covered except in the downside case (80.3% recovery rate).

Value doesn’t flow to the existing equity at all in the downside cases. The old AMC equity receives 19.3% and 40.5% of the new company, in the base case and upside case respectively. Given the contemplated equity value, the recovery value of the old AMC equity is about 138.9% and 334.2% of its current market cap in the base and upside case. However, once in court, you can expect the 2L creditors will fight the old equity on valuation to take a bigger share of the equity pie. For context, assuming ~$700 million base-case EBITDA, the old equity will see no recovery.

Assuming Base-Case EBITDA of $700 million

Source: Author’s Estimation

Conclusion

AMC is not out of the woods yet despite the recent stock performance. As each day passes by, the accrued liabilities increases and the 2L PIK notes (if the exchange offer is accepted) increases in overall claim size, both taking value away from the existing equity. While the equity in theory could be worth a lot more from a fair market value perspective, this bullish stance depends on things going back to the way it was pre-COVID and AMC stays away from a major bankruptcy restructuring. I also doubt a white knight will show up and just write a big equity cheque since AMC is still burning through its cash pile. While the market seems to be excited for the prospect of an accelerated reopening of the economy, let’s not forget that AMC had a debt problem before all this.

Let me know what you think in the comment section.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in AMC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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AMC Entertainment: The Possible Outcomes And Probabilities (NYSE:AMC)


AMC Entertainment (AMC) was poised for a strong recovery in 2020. Following several years of debt-fuelled expansion manifesting in acquisitions of screens, expensive CAPEX program, and, quite frankly, gross misallocation of capital by management – 2020 was billed as the year for free cash flow generation and deleveraging. It was meant to create that virtuous cycle of increased free cash flow, lower debt, lower interest costs, upgraded credit rating, and, ultimately, meaningfully, enhance the value of the equity stub.

But then, the COVID-19 crisis hit the company like a meteor. Prior to discussing this, it is useful to revisit the pre-crisis debate on the impact of streaming on the industry.

The rumour of (movie-going) demise is greatly exaggerated.

This topic has been hotly debated in previous articles and comments section.

My view is that this is not necessarily a binary outcome. The increasing popularity of streaming services certainly dampens demand by reducing the frequency of visits to cinemas and, therefore, hurts overall industry growth. However, the industry has and will continue to adjust to it (reclining seats, F&B, memberships programmes, etc.). So, in short, whilst I agree there is an adverse impact, it is very far from the death knell to the industry, some describe it to be.

I also do not believe the theatrical release window arrangements with the film studios will change any time soon. The economics are compelling in monetising the value of new titles through the theatrical release window compared with PVOD. Aside from the big screen and social experience, theatrical releases also benefit from F&B cash flow as well as distinct revenue for each and every viewing customer (PVOD can be watched by large number of family and friends for a single fee).

The Liquidity Crunch

The COVID-19 crisis, essentially, left the company with no revenues but substantial fixed costs. The latter predominantly comprise of the quarterly run rate of ~250 million theatre rental expenses as well as $90 million interest costs.

Liquidity is king in a crisis, and it is clear that AMC was ill-prepared.

As of 31 December 2019, it had total liquidity of $597 million, comprised of $265 million of cash and $332 million of availability under revolving lines of credit.

As the lockdowns began in earnest, the company went into liquidity preservation mode – furloughing most employees (including CEO and management) and stopping all other payments where possible (e.g. looking to defer theatre rental payments).

By 31st March, its available cash reserves reduced to ~300 million, predominantly from existing revolving lines of credits. AMC appeared to be on the brink of bankruptcy. Then, on the 17th of April, it received a lifeline with a $500 million private placement offerings carrying a yield of 10.5%.

The additional funds would allow it to survive until the end of November without any revenue coming in the doors. The hope from management is that cinemas will be able to reopen in the summertime and AMC will survive in its current form.

The key question, of course, is the proverbial “what now?”. What are the possible outcomes and associated probabilities going forward.

Option 1: AMC will survive and thrive (20% probability)

This is the optimistic scenario.

The health crisis will subside and theatres will reopen in mid-July with much fanfare leading with Christopher Nolan’s sci-fi thriller “Tenet”. Whilst initially social-distancing measures (such as limiting capacity) will apply, these will subside in the weeks and months to come as the health crisis continues to subside and AMC will benefit from the pent-up demand for cheap live entertainment.

The deleveraging narrative will be resurrected, short-sellers will be squeezed, and the scars from COVID-19 will begin to heal (and substantial damage has been already done). However, AMC can start looking forward to restructure its capital base and begin to unshackle from large and expensive debt assumed in the expansionary years.

Option 2: AMC will survive but struggle (15% probability)

In this scenario, AMC will survive but the “new normal” will mean lower revenues as cinema attendance does not revert to prior highs (either through social distancing measures and/or accelerating trend towards streaming). In a largely fixed cost base business, this can quickly translate to a downward spiral and AMC will struggle to keep its head above waters, generate free cash flow, and/or address its debt-laden balance sheet. AMC will try to buy some time by driving down costs further and monetising some assets. The share price will likely stagnate with a persistent downward bias.

But, ultimately, in the medium term, this scenario will probably lead to one of the other options listed below.

Option 3: Bankruptcy (25% probability)

The bond market tells you that this is a very credible possibility. AMC bonds are trading one notch above default and as low as 30 cents in the dollar.

AMC’s CEO Adam Arun has done his utmost best to avoid this option and buy some time. I believe it has been extremely close to “game over” prior to the Fed’s actions supporting the debt markets. Fortunately, for current AMC shareholders, it managed to buy some time until November 2020 with the $500 million private placement.

In this scenario, the health crisis is not resolved and/or second wave is coming during the fall. AMC is forced to close its theatres again and liquidity dries up.

Shareholders effectively get wiped out.

Option 4: China’s Wanda as a white knight (10% probability)

China’s Dalian Wanda Group is AMC’s largest shareholder and holds 49.8% of its common shares. Clearly, it has a strong interest to protect the value of its investments but does it have the political backing (and cash flow) to do so?

This article summarises the known considerations, including China’s desire to focus domestically and reduce overseas investments (Wanda offshore ambitions were curbed substantially two years ago) as well as Wanda’s own woes in dealing with the COVID-19 impact on its commercial property and own domestic Cinemas businesses. All in all, in the near term, this makes this scenario appear to be less likely.

Option 5: Acquisition (30% probability)

AMC share price soared following speculation of a buyout by Amazon (AMZN). There are a number of reasons why Amazon would be an interested party. Firstly, it can be quite complementary to its Amazon Studios business helping to monetise content further before moving it to the streaming platform. Secondly, it can neatly bundle it as part of its Amazon Prime perks – the playbook with Whole Foods acquisition could be on the cards again. In fact, in 2018, both Amazon and Netflix (NFLX) were reported to be in the running for Landmark Theatres but lost out to another bidder.

The film studios may also be in play now given that the old anti-trust rules, barring them from owning theatres are likely to be abolished.

Final Thoughts

From an existing shareholders’ perspective options, 1, 4, and 5 are clearly preferable (which, in my view, represent a total of 60% probability).

I assign the highest probability of 30% for option 5 (an acquisition) simply because the economics make sense for a number of candidates. From a potential buyer’s perspective, the bankruptcy route may have been the most preferred route to acquisition – primarily due to the high levels of debt on the balance sheet. AMC changed the calculus on this (at least, temporarily) with the $500 million private placement eliminating any bankruptcy talks and now there may also be a fear of missing out for certain buyers. If COVID-19 trajectory continues to improve, a deal may be struck sooner than later.

Having said that, the outcomes are quite binary and a high probability of severe downside exists as well (assessed as 40%, in my view).

Whilst I am moderately bullish on AMC, I see it as a short-term speculative trading position for now.

I am also very keen to read others’ views on AMC in the comments section.

Disclosure: I am/we are long AMC, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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