The fresh deal has encouraged shareholders, but is the cinema chain just kicking the can down the road?
On Monday, AMC Entertainment (NYSE:AMC) announced a fresh debt restructuring plan containing $1.2 billion of “transformational” secured-term loans. That day, AMC stock jumped 5.39% to $5.28.
However, it’s possible that AMC’s shareholders celebrated too soon, with the stock being vulnerable to a pullback.
The company’s debt restructuring will surely buy AMC Entertainment some time to engineer a hoped-for turnaround. However, that turnaround requires an improvement in box-office attendance, which is still below pre-COVID-19 pandemic levels, even after several years.
Furthermore, the restructuring doesn’t eliminate AMC Entertainment’s debt. It just kicks the can down the road, so to speak. AMC will still have to repay its debt with interest, but at a later date. It’s a sizable debt burden, with Bloomberg estimating that AMC Entertainment has $4.5 billion of long-term borrowings.
New loans, same problems
Per AMC’s press release on the matter, the restructuring deal will allow AMC Entertainment to swap out $1.2 billion of debt due 2026 for new loans due 2029 and 2030. So again, this portion of AMC’s debt load isn’t eliminated; it’s only deferred.
We wonder whether AMC Entertainment CEO Adam Aron drew a hasty conclusion from the new debt arrangement. He argued that the agreement “represents an undeniably strong vote of confidence by our lenders in AMC’s future”. However, it could also just mean that AMC’s creditors aren’t 100% confident that the company can/will repay its debt by 2026.
Aron also predicted that “the box office challenges of the first half of 2024 are now in the rear-view mirror”, and that the firm expects “strong year-over-year box office growth in the back half of 2024, continuing into 2025 and 2026”.
Two and a half years of strong annual growth is a highly optimistic prediction, and now AMC has the difficult task of living up to Aron’s ultra-optimistic forecast.
Details the AMC stock buyers may have missed
The traders who bid up the AMC stock price on Monday may have overlooked an unfortunate detail of AMC Entertainment’s press release. Specifically, the company stated that it has the opportunity to “reduce debt by $464 million through the conversion of exchangeable notes into equity”. This “opportunity” would mean more AMC stock shares in circulation, raising the unfavorable prospect of share-value dilution.
Finally, the press release reported that AMC Entertainment “has arranged for the potential issuance of up to an additional $50 million of Exchangeable Notes in order to repurchase additional outstanding debt due in 2025, 2026 and 2027”. So, don’t be too surprised if AMC adds to its debt load, even if some stock traders may operate under the misconception that AMC Entertainment is eliminating its debt with the new restructuring deal.
Aron’s positive spin job is impressive, and it’s fine that AMC Entertainment has more time to repay its debt. However, this doesn’t change the fact that the firm may end up adding to its debt load and will have to repay all of that debt with interest.
Plus, there’s no guarantee that Aron’s forecast of “strong year-over-year box office growth” for the next two and a half years will actually come to fruition. Moreover, AMC Entertainment’s investors shouldn’t celebrate the prospect of share dilution.
Therefore, any short-term AMC stock price pump will likely be followed by a hangover and a steep sell-off.
