Mon 12/21/2020 16:02 PM
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Certain lenders to AMC Entertainment Holdings are encouraging the cinema operator to file for bankruptcy in the coming months and to allege in court after filing that an uptiering of $600 million in convertible notes held by Silver Lake Group to the same level as senior secured term lenders in July constituted a preferential transfer to an insider, according to sources. Continue reading as our Americas Core Credit team analyzes AMC Entertainment and their lenders' push for a chapter 11 filing by the summer and request a trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.

As part of an exchange of $2.29 billion unsecured bonds for $1.46 billion of second lien PIK notes completed on July 31, AMC amended the terms of its $600 million 2.95% senior convertible notes due 2026 and granted a first-priority lien on the same assets that secure the company’s other first lien debt for the benefit of the convertible notes owned by Silver Lake Group LLC, according to a press release accompanying the initial exchange announcement. AMC also issued $100 million of 10.5% senior secured first lien notes due 2026 to Silver Lake in connection with the exchange and amendments consummated on July 31.

Prior to the refinancing, AMC had a total of roughly $2.7 billion of funded first lien debt (excluding the Odeon revolver), comprising a $1.97 billion term loan, $212 million under the AMC revolver and $500 million of first lien notes issued in April. After the July refinancing, AMC had roughly $3.6 billion of funded first lien debt, representing an incurrence of $900 million in incremental first lien debt. The additional $900 million includes the $600 million of Silver Lake convertible notes uptiered to first lien debt and $300 million of new money, including the $100 million of 10.5% Silver Lake notes.

Term lenders who were diluted by the refinancing are seeking to work with the company’s management to unwind the uptiering of the convertible notes as a preferential transfer under the Bankruptcy Code as part of a chapter 11 filing, the sources said. AMC said in a recent disclosure that “certain first lien creditors and other parties have indicated a willingness to provide financing in a bankruptcy scenario” but that “creditors that hold predominately second lien debt will continue to be supportive of its efforts to avoid bankruptcy as a result of their debt ranking junior to first lien debt.”

Additionally, in a bankruptcy, the official committee of unsecured creditors could seek derivative standing to argue those claims on behalf of the company if the lenders are unable to convince AMC as debtor to prosecute the uptiering as a preferential transfer, the sources added. Beyond the merit of the claims, a committee seeking standing would need to show the company had “unjustifiably refused” to bring the claims. AMC could attempt to defeat the unjustifiable refusal prong by settling any claims with Silver Lake in exchange for some contribution under a plan of reorganization.

Time would be a concern because preference claims against insiders must occur within one year prior to the bankruptcy filing. Furthermore, Silver Lake would need to be proven as an “insider,” and “insiders” under the Bankruptcy Code include, but are not limited to, directors and officers of the debtor and “person[s] in control of the debtor.” Parties pursuing the preference claim could point to Silver Lake’s ability to nominate one director, currently Silver Lake managing director Lee Wittlinger, or Silver Lake’s agreements with AMC dating to 2018, when AMC issued the $600 million in 2024 convertible notes to Silver Lake and which AMC used in part to repurchase around 24 million Class B shares from its majority shareholder Dalian Wanda Group, as support for an insider finding. Non-insider preferences are limited to the 90-day period prior to the bankruptcy filing, which has expired relative to the July transactions.

AMC said on Dec. 11 that the company is on track to deplete its existing cash resources during January 2021 in the absence of additional liquidity. AMC estimated that it would require about $750 million of additional liquidity to fund its cash requirement through 2021 and added that the company will need to engage with its first lien creditors when a covenant holiday resumes in the second quarter of 2021, and from which AMC expects it will need an additional waiver, based on currently expected results.

AMC’s $1.97 billion term loan due 2026 was quoted today at 63.25/64.25, according to a trading desk.

AMC and Silver Lake did not immediately respond to requests for comment.

--Alexander Saeedy
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