AMC Entertainment Holdings, Inc
Despite Being in Position to Repurchase Some or All $1.5B of 10% 2L Notes, AMC May Wait to Take Action Following January Box-Office Slump
Wed 02/09/2022 07:00 AM
AMC Debt Analysis:
On the heels of AMC’s first lien debt refinancing, the company has the ability to repurchase its $1.5 billion of 10% second lien notes due 2026, which account for about 40% of the company’s pro forma annual cash interest. AMC is in position to take out the notes, as its liquidity position and prepayment or repurchase capacity under its debt documents exceed the principal value of the 2L notes, which traded at 93 yesterday, Tuesday, Feb. 8.
However, fully repurchasing the 2L notes would exhaust most of the company’s cash balance, and Reorg concludes that the company may decide to wait until the second half of 2022 or later before repurchasing some or all of the 2L notes, given potential cash flow uncertainty following a January box-office slump and a 2022 film slate weighted toward late spring and the second half of the year.
January domestic box-office performance has dropped following a strong fourth quarter due to a quiet film slate. The majority of anticipated 2022 blockbusters are expected to be released in May or later, implying that AMC’s cash flow profile may be weak in the first few months of the year and stronger later in the year.
If AMC were to redeem the 2L notes, it would incur a make whole premium resulting in a redemption price of at least 106% prior to June 2023 that steps down to at least 103% after June 2023. If AMC seeks to repurchase the notes, it would likely be able to acquire at least a portion of the notes outstanding at levels closer to market pricing.
In January, CEO Adam Aron tweeted that his New Year’s resolution for AMC in 2022 was to “refinance some of our debt to reduce our interest expense, push out some debt maturities by several years and loosen covenants.” Reorg estimates that last week’s first lien debt refinancing will reduce AMC’s cash interest by $24 million a year on a pro forma basis. Repurchasing or redeeming all $1.5 billion of 2L notes would boost AMC’s annual levered free cash flow by $150 million through further interest savings.
Historical pricing for the 2L notes, according to TRACE, is shown below:
AMC’s capital structure is shown below:
After amassing over $2 billion of liquidity driven by equity issuances in late 2020 and early 2021, AMC said in August that its main priority was ensuring it had sufficient liquidity to get through the Covid-19 pandemic. Management noted that its next priorities, in order, were strengthening the balance sheet through debt and interest cost reductions, reinvesting in the business offerings, and pursuing partnerships. The company announced at that time that it would elect to pay interest in cash instead of in-kind given its strong liquidity position.
The $1.5 billion of 10% second lien notes due 2026 is among the last remaining high interest debt AMC has. AMC estimates it had cash of $1.6 billion and liquidity of more than $1.8 billion as of Dec. 31, 2021, a “record year-ending” amount. This amount would enable it to repurchase a substantial portion, or all, of its 2L notes.
Further, Americas Covenants by Reorg concluded that AMC has at least $2.32 billion of capacity it could use to purchase the 2L notes in the open market. The 2L notes traded at 93 on Feb. 8, implying a market value of $1.4 billion, which is less than the company’s Dec. 31, 2021, cash balance as well as its capacity to repurchase the notes under its debt documents.
Despite the apparent benefits, primarily in the form of reduced interest expense, from taking out the 2L notes, repurchasing the full amount of the 2L notes would exhaust most of the company’s $1.6 billion cash balance. The decision to exhaust its cash balance in the near term may not be wise, given the box-office trends discussed below. The company’s recent first lien refinancing deal added $77 million of debt principal to the balance sheet and minimized the use of cash, despite the substantial cash balance, potentially suggesting that AMC management does not want to use cash to take out debt at this time.
AMC’s cash flow outlook for 2022 hinges on the performance of the domestic box office and timing of film releases. After strong performance in the fourth quarter driven by the release of “Spider-Man: No Way Home” in December 2021, domestic box-office results have plummeted in January 2022, according to boxofficemojo.com, as no new blockbusters have been released.
In the third quarter of 2021, AMC likely needed revenue of about 60% of 2019 levels to achieve breakeven unlevered simple FCF, defined by Reorg as EBITDA less capital expenditures. In January 2022, the U.S. domestic box office was only about 48% of 2019 levels. Therefore, it is likely that AMC burned cash in January based on how box-office performance translates into FCF for AMC, as illustrated for recent quarters below:
There are no domestic blockbusters expected until “The Batman” in early March, implying that AMC could burn cash in February. According to the-numbers.com, the majority of the largest expected grossing movies for 2022 are not expected to be released until May or later. Thus, it is possible that AMC will not generate meaningful unlevered FCF in the first few months of the year, and that is before factoring in cash interest, which Reorg estimates to be roughly $380 million annually, assuming all cash / PIK toggle interest is paid in cash.
AMC had the option to pay interest on its 2L notes in cash (10%) or in kind (12%) until Dec 15, 2021, the third coupon date. The company indicated last August that it would pay this December coupon in cash, and going forward, the company will have to pay interest in cash as long as liquidity exceeds $400 million (liquidity was $1.8 billion as of Dec. 31, 2021). The next coupon date is June 15, 2022, in an amount of roughly $75 million.
If cash redemption or a large repurchase of the 2L notes is not an option given the cash flow concerns outlined above, the company could consider a refinancing. However, AMC’s new first lien notes priced last week with a coupon of 7.5%, and the 2L notes currently yield over 12%. Therefore, it appears unlikely AMC would find refinancing the 2L notes attractive at this time.
Alternatively, AMC could seek to raise roughly $300 million of additional 1L debt and use the proceeds, along with cash, to repurchase some or all of the 2L notes, reducing the net cash impact. This would potentially reduce interest expense through a lower 1L coupon, at the expense of using 1L debt capacity, though any net use of cash would be at odds with management’s strategy in the 1L refinancing. Reorg Covenants concludes that AMC can incur $322 million of additional first lien debt, including draws on the revolver, $150 million of additional second lien debt, $50 million of unsecured debt and at least $50 million of structurally senior debt.
Ultimately, it appears that AMC’s best course of action may be to repurchase only a smaller portion of the 2L notes principal while retaining sufficient liquidity to weather further box-office weakness, and/or to wait to make further capital structure adjustments until its cash flow outlook is more certain.
--Krishan Sutharshana
On the heels of AMC’s first lien debt refinancing, the company has the ability to repurchase its $1.5 billion of 10% second lien notes due 2026, which account for about 40% of the company’s pro forma annual cash interest. AMC is in position to take out the notes, as its liquidity position and prepayment or repurchase capacity under its debt documents exceed the principal value of the 2L notes, which traded at 93 yesterday, Tuesday, Feb. 8.
However, fully repurchasing the 2L notes would exhaust most of the company’s cash balance, and Reorg concludes that the company may decide to wait until the second half of 2022 or later before repurchasing some or all of the 2L notes, given potential cash flow uncertainty following a January box-office slump and a 2022 film slate weighted toward late spring and the second half of the year.
January domestic box-office performance has dropped following a strong fourth quarter due to a quiet film slate. The majority of anticipated 2022 blockbusters are expected to be released in May or later, implying that AMC’s cash flow profile may be weak in the first few months of the year and stronger later in the year.
If AMC were to redeem the 2L notes, it would incur a make whole premium resulting in a redemption price of at least 106% prior to June 2023 that steps down to at least 103% after June 2023. If AMC seeks to repurchase the notes, it would likely be able to acquire at least a portion of the notes outstanding at levels closer to market pricing.
In January, CEO Adam Aron tweeted that his New Year’s resolution for AMC in 2022 was to “refinance some of our debt to reduce our interest expense, push out some debt maturities by several years and loosen covenants.” Reorg estimates that last week’s first lien debt refinancing will reduce AMC’s cash interest by $24 million a year on a pro forma basis. Repurchasing or redeeming all $1.5 billion of 2L notes would boost AMC’s annual levered free cash flow by $150 million through further interest savings.
Historical pricing for the 2L notes, according to TRACE, is shown below:
AMC’s capital structure is shown below:
After amassing over $2 billion of liquidity driven by equity issuances in late 2020 and early 2021, AMC said in August that its main priority was ensuring it had sufficient liquidity to get through the Covid-19 pandemic. Management noted that its next priorities, in order, were strengthening the balance sheet through debt and interest cost reductions, reinvesting in the business offerings, and pursuing partnerships. The company announced at that time that it would elect to pay interest in cash instead of in-kind given its strong liquidity position.
The $1.5 billion of 10% second lien notes due 2026 is among the last remaining high interest debt AMC has. AMC estimates it had cash of $1.6 billion and liquidity of more than $1.8 billion as of Dec. 31, 2021, a “record year-ending” amount. This amount would enable it to repurchase a substantial portion, or all, of its 2L notes.
Further, Americas Covenants by Reorg concluded that AMC has at least $2.32 billion of capacity it could use to purchase the 2L notes in the open market. The 2L notes traded at 93 on Feb. 8, implying a market value of $1.4 billion, which is less than the company’s Dec. 31, 2021, cash balance as well as its capacity to repurchase the notes under its debt documents.
Despite the apparent benefits, primarily in the form of reduced interest expense, from taking out the 2L notes, repurchasing the full amount of the 2L notes would exhaust most of the company’s $1.6 billion cash balance. The decision to exhaust its cash balance in the near term may not be wise, given the box-office trends discussed below. The company’s recent first lien refinancing deal added $77 million of debt principal to the balance sheet and minimized the use of cash, despite the substantial cash balance, potentially suggesting that AMC management does not want to use cash to take out debt at this time.
AMC’s cash flow outlook for 2022 hinges on the performance of the domestic box office and timing of film releases. After strong performance in the fourth quarter driven by the release of “Spider-Man: No Way Home” in December 2021, domestic box-office results have plummeted in January 2022, according to boxofficemojo.com, as no new blockbusters have been released.
In the third quarter of 2021, AMC likely needed revenue of about 60% of 2019 levels to achieve breakeven unlevered simple FCF, defined by Reorg as EBITDA less capital expenditures. In January 2022, the U.S. domestic box office was only about 48% of 2019 levels. Therefore, it is likely that AMC burned cash in January based on how box-office performance translates into FCF for AMC, as illustrated for recent quarters below:
There are no domestic blockbusters expected until “The Batman” in early March, implying that AMC could burn cash in February. According to the-numbers.com, the majority of the largest expected grossing movies for 2022 are not expected to be released until May or later. Thus, it is possible that AMC will not generate meaningful unlevered FCF in the first few months of the year, and that is before factoring in cash interest, which Reorg estimates to be roughly $380 million annually, assuming all cash / PIK toggle interest is paid in cash.
AMC had the option to pay interest on its 2L notes in cash (10%) or in kind (12%) until Dec 15, 2021, the third coupon date. The company indicated last August that it would pay this December coupon in cash, and going forward, the company will have to pay interest in cash as long as liquidity exceeds $400 million (liquidity was $1.8 billion as of Dec. 31, 2021). The next coupon date is June 15, 2022, in an amount of roughly $75 million.
If cash redemption or a large repurchase of the 2L notes is not an option given the cash flow concerns outlined above, the company could consider a refinancing. However, AMC’s new first lien notes priced last week with a coupon of 7.5%, and the 2L notes currently yield over 12%. Therefore, it appears unlikely AMC would find refinancing the 2L notes attractive at this time.
Alternatively, AMC could seek to raise roughly $300 million of additional 1L debt and use the proceeds, along with cash, to repurchase some or all of the 2L notes, reducing the net cash impact. This would potentially reduce interest expense through a lower 1L coupon, at the expense of using 1L debt capacity, though any net use of cash would be at odds with management’s strategy in the 1L refinancing. Reorg Covenants concludes that AMC can incur $322 million of additional first lien debt, including draws on the revolver, $150 million of additional second lien debt, $50 million of unsecured debt and at least $50 million of structurally senior debt.
Ultimately, it appears that AMC’s best course of action may be to repurchase only a smaller portion of the 2L notes principal while retaining sufficient liquidity to weather further box-office weakness, and/or to wait to make further capital structure adjustments until its cash flow outlook is more certain.
--Krishan Sutharshana
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