What Do Moody's Debt Designations Mean For AMC?

Disclosure/Disclaimer: May Ling owns AMC bonds. The following is not investment or financial advice, and is for educational purposes only.

I recently got a question from @mikevogr and @conchkids on Twitter/X asking why AMC bonds have a “/LD” designation by Moody's, and whether they are a bearish signal. This is a great question and important for evaluating these bonds.

Before we delve into this topic, we should address the context behind the question, namely, the misunderstanding that an “/LD” designation means AMC is defaulting on its debt and the company will go bankrupt in the wake of a recent SEC filings (December 12 to 22, 2023, January 4, 2024) that included debt-for-equity swaps. Or, the more conspiratorial theory that 2Ls (second lien holders, who are behind first lien holders in priority for repayment in the event of bankruptcy), are colluding to force bankruptcy to extract cash and leave AMC shareholders holding the bag. Nothing could be further from the truth, and I’ll address some points that suggest the actions that led to the “/LD” designation could signal something positive for the company. 

The answer has 4 parts:

1) What's it mean, Investopedia-style definition?

2) What's it mean, fundamental dynamics in general?

3) What's it mean, for debt holders?

4) What's it mean, for equity holders?

This is a quick explanation. Depending on who you are, and your background/experience, you might have deeper thoughts on this topic. 

WHAT DOES THIS MEAN, INVESTOPEDIA-STYLE DEFINITION? 

From the Moody's Website "/LD" means “limited default”. All of these debt-for-equity swaps fall under this category in that the debt holders, instead of risking default, decided to take equity instead.

LD is a tag or marker in their data feed. It has little meaning by itself other than to indicate that a fundamental analyst (debt or equity) should go look up why lenders did something with their debt. 

Remember, these data feeds serve as a sort of data history that are used long after any particular debt obligation is relevant to the markets.

WHAT DOES IT MEAN, FUNDAMENTAL DYNAMICS IN GENERAL? 

In this case, it demonstrates clearly that at least some portion of those who own the 2L's are willing to negotiate rather than push the company into bankruptcy. This has implications to both debt and equity holders. 

WHAT DOES IT MEAN, DEBT HOLDERS?

Note that the debt trades “Caa-” AKA "busted." This implies a high probability of going bankrupt. Hence, any current owner or buyer of this debt has priced that in. LD is going to speak to recovery or timing.

If you own bonds that are higher priority than the 2L's (e.g. the Odeon debt) you're probably cool with this. There is less cash flow to be spent on other people's interest payments. 

Since the bonds in question that were repurchased or swapped with equity were “PIK/Toggles”, there was flexibility and the option to pay only the interest (e.g. at a higher rate). Instead, the lenders opted to work with AMC and accept a prepayment penalty to restructure the debt with no principal repaid with cash. Instead that has been paid with equity (at a 10% premium). Lenders may have been able to not only harvest losses in 2023, but increase their liquidity, along with a possibility of upside if the share price recovers. 

If you trade lower in the debt capital structure, this is now a data point you can use in your modeling of what it might mean to take an "out" now. This deal sets the price that a 2L debt holder took to get out of the bonds. This is a little like the last house to sell in your neighborhood setting the value of your house.

For debt holders either above or below the 2L's, I would be surprised if this news meaningfully impacted their decisions. However, long term debt holders who want to do something else with capital invested in AMC now have an idea of what cashing out now would look like.  

WHAT DOES IT MEAN, EQUITY HOLDERS?

The “/LD” by itself means nothing for the equity holders other than what was already known. Namely, dilution would be part of the way in which AMC will be paying back its debts. 

The specific terms for the offering from the 8K have more value, as they set an example of the nature and types of deals being made to get rid of the debt. 

For one thing, given the price at which the deal was done, any debt holder doing such a transaction would take an additional loss if they sell right away, which suggests debt holders are taking a long term view on the company. 

The fact the deal happened at all also reveals the mindset of the 2L's. It suggests I might be right when I say that the 2L's do not believe an AMC bankruptcy is in their best interest, and that there is some faith in the company’s ability to execute.

However, I will say that they didn't swap all the debt owed in 2L, so I could still be wrong.