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.
Nonetheless, it’s possible that AMC’s shareholders celebrated too soon, with the stock being vulnerable to a pullback.
The corporate’s debt restructuring will certainly buy AMC Entertainment a while to engineer a hoped-for turnaround. Nonetheless, that turnaround requires an improvement in box-office attendance, which remains to be below pre-COVID-19 pandemic levels, even after several years.
Moreover, the restructuring doesn’t eliminate AMC Entertainment’s debt. It just kicks the can down the road, so to talk. AMC will still should repay its debt with interest, but at a later date. It’s a large debt burden, with Bloomberg estimating that AMC Entertainment has $4.5 billion of long-term borrowings.
Recent 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 brand spanking new loans due 2029 and 2030. So again, this portion of AMC’s debt load isn’t eliminated; it’s only deferred.
We wonder if AMC Entertainment CEO Adam Aron drew a hasty conclusion from the brand new debt arrangement. He argued that the agreement “represents an undeniably strong vote of confidence by our lenders in AMC’s future”. Nonetheless, it could also just mean that AMC’s creditors aren’t 100% confident that the corporate can/will repay its debt by 2026.
Aron also predicted that “the box office challenges of the primary half of 2024 at the moment are within the rear-view mirror”, and that the firm expects “strong year-over-year box office growth within 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 as much as Aron’s ultra-optimistic forecast.
Details the AMC stock buyers could have missed
The traders who bid up the AMC stock price on Monday could have missed an unlucky detail of AMC Entertainment’s press release. Specifically, the corporate stated that it has the chance 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 as much as a further $50 million of Exchangeable Notes so as 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 when some stock traders may operate under the misunderstanding that AMC Entertainment is eliminating its debt with the brand new restructuring deal.
Aron’s positive spin job is impressive, and it’s advantageous that AMC Entertainment has more time to repay its debt. Nonetheless, this doesn’t change the undeniable fact that the firm may find yourself adding to its debt load and can 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 subsequent two and a half years will actually come to fruition. Furthermore, AMC Entertainment’s investors shouldn’t have fun the prospect of share dilution.
Due to this fact, any short-term AMC stock price pump will likely be followed by a hangover and a steep sell-off.