Mon 02/08/2021 10:54 AM
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Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
Debt Documents

As AMC Entertainment continues to grapple with the effects of the coronavirus and its financial health continues to deteriorate, the movie theater operator has taken a number of steps to fortify its liquidity, including raising about $870 million through equity issuances, issuing $100 million of 15%/17% first lien notes due 2026 to Mudrick Capital and receiving commitments for a new £400 million senior secured term loan facility to refinance its existing £100 million Odeon revolving credit facility. Continue reading for our Americas Covenants team's analysis of the AMC debt and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

In addition, following a massive rally in AMC’s stock price, affiliates of Silver Lake Group elected to convert all $600 million of the company’s 2.95% convertible senior secured notes due 2026 into common stock at a conversion price of $13.51 per share.

AMC’s capital structure as of Sept. 30, 2020, adjusted for the refinancing of the Odeon credit facility, the conversion of the first lien convertible notes, the issuance of the Mudrick first lien notes, a $5 million amortization payment under the term loan and increased balance sheet cash from recent equity issuances, is illustrated below for reference:
AMC capital structure

Last week, we discussed whether the recent equity issuances and the conversion of the convertible notes provide the company with additional flexibility to incur additional debt and to purchase its outstanding second lien notes in the open market.

In this article, we discuss the company’s ability to incur additional secured debt under its debt documents.

Although the 2025 first lien notes provide the company with significant flexibility to incur additional first lien debt, debt documents governing its other outstanding secured debt likely allow for $50 million of 1.5 lien debt and $100 million of debt secured on a pari basis with the second lien notes.
Increased Secured Debt Capacity From Conversion of Convertible Notes

Oftentimes, when a company repays outstanding debt, its permitted debt capacity under its debt documents may increase by the amount of such repaid debt due to the replenishment of capacity under the baskets from which the debt was incurred.

However, to the extent the repaid debt was permitted to be incurred under debt baskets that specifically permitted the repaid debt to have been incurred, unless the company’s debt documents contemplate the incurrence of refinancing debt regarding the repaid debt after the repaid debt has been repaid, the company will likely not have any additional debt capacity from the repayment of such debt.

We recently analyzed whether the conversion of the first lien convertible notes provides AMC with additional first lien debt capacity and concluded that although the conversion likely provides AMC with additional first lien debt capacity under the 2025 first lien notes, it does not increase capacity under the credit agreement or the 2026 secured notes.
Increased Secured Debt Capacity From Proceeds of Recent Equity Issuances

Although each of AMC’s debt documents provide debt capacity equal to 100% of proceeds from equity issuances, because the contribution debt baskets do not include corresponding lien baskets, the company’s recent equity issuances do not provide the company with any additional secured debt capacity.
Secured Debt Capacity

AMC’s ability to incur additional first lien debt will be governed by its ability to incur pari debt under its first lien debt documents and senior lien debt under the second lien notes. Likewise, its ability to incur 1.5 lien debt will be governed by its ability to incur junior lien debt under its first lien debt documents and senior lien debt under the second lien notes.
Under the Credit Agreement

AMC’s ability to incur debt and liens under the credit agreement is illustrated below. In connection with the issuance of the 2025 first lien notes and July 2026 first lien notes, the credit agreement was amended to conform to the permitted capacities under the 2025 first lien notes and 2026 first lien notes.

Following the issuance of the 2026 July first lien notes, the credit agreement permitted the company to incur $100 million of additional first lien notes and $150 million of junior lien debt using capacity under general debt and lien baskets. The company fully utilized its first lien capacity to issue the Mudrick first lien notes.

Taken together, the credit agreement currently permits the company to incur $150 million of junior lien debt.
Under the First and Second Lien Notes

Although, as illustrated below, the debt and lien baskets under the first lien and second lien notes are substantially similar, there is one significant difference that results in the 2025 first lien notes currently providing the company with significant additional first lien debt capacity and the 2026 first and second lien notes providing it with limited additional first lien debt capacity.

Credit Facilities Debt Baskets

All of the secured notes permit AMC to incur first lien debt under credit facilities debt baskets not to exceed $2.25 billion, plus additional amounts in compliance with a 3x first lien leverage ratio, plus:

  • Under the 2025 first lien notes, the greater of $700 million, less outstanding 2025 first lien notes on the issue date and 75% of EBITDA.



  • Under the July 2026 first lien notes and second lien notes, the greater of $100 million and if 75% of EBITDA is at least $700 million, 75% of EBITDA, less $700 million.



  • Under the Mudrick first lien notes, if 75% of EBITDA is at least $800 million, 75% of EBITDA, less $800 million.


Although each indenture requires outstanding debt under the credit agreement at issuance to be deemed incurred under the credit facilities debt baskets at issuance, not only is there no explicit restriction on reclassifying such outstanding debt to other debt and lien baskets after issuance, but there is also no requirement that such outstanding debt utilize the $2.25 billion basket to the extent the company could meet a 3x first lien leverage test and classify such debt as having been incurred under the 3x first lien leverage test.

While AMC was unable to meet the 3x first lien leverage test when the 2026 secured notes were issued (based on financials for the June 2020 quarter for the issuance of the July 2026 first lien notes and second lien notes and based on financials for the December 2020 quarter for the issuance of the Mudrick first lien notes), when the 2025 first lien notes were issued in April, based on financials for the March 2020 quarter, pro forma for the issuance of the 2025 first notes notes, the company’s first lien leverage was about 2.8x.

As a result, under the 2025 first lien notes, outstanding debt under the credit agreement could have been deemed incurred under the 3x first lien leverage component, leaving the $2.25 billion component unused. Under the 2026 secured notes, in comparison, outstanding debt under the credit agreement has to have utilized the $2.25 billion.

However, whereas the 2026 first lien notes and second lien notes included separate baskets permitting the other 2026 first lien notes other than the Mudrick first lien notes (the Mudrick first lien notes also include a separate basket permitting the Mudrick first notes), the 2025 first lien notes did not.

Taken together, as illustrated below, although the 2025 first lien notes’ credit facilities debt basket currently permits the company to incur almost $2 billion of additional first lien debt, the 2026 secured notes’ credit facilities debt baskets likely only permit an additional $50 million of first lien debt.

General Debt, General Liens Baskets

While the 2025 first lien notes permit additional first lien debt using capacity under a general-purpose liens basket that can be paired with a larger general-purpose debt basket, the 2026 secured notes’ general-purpose liens baskets can only be used to incur $150 million of additional debt secured by liens that are pari with the 2026 second lien notes.

Total First Lien Debt Capacity Under the Secured Notes

Taken together, although the 2025 first lien notes currently permit AMC to incur a significant amount of additional first lien debt, the 2026 secured notes likely currently limit it from incurring more than $50 million of additional first lien debt.

Total Secured Debt Capacity Under All Debt Documents

As illustrated below, the credit agreement currently permits AMC to incur $150 million of debt secured by liens that are junior to the liens securing the debt under the credit and the 2025 first lien notes likely currently permit AMC to incur about $2.15 billion of debt that can be secured by liens of any priority.

However, the 2026 secured notes likely permit AMC to incur only $50 million of debt secured on a senior lien basis to the second lien notes and $150 million of debt secured on a pari basis to the second lien notes.

As a result, AMC is currently permitted to incur $50 million of 1.5 lien debt (limited by the 2026 secured notes) and $100 million of debt secured on a pari basis with the second lien notes.
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