When Will AMC Restructure It's 2nd Lien Debt?

Disclosure: The author owns securities in the referenced company or companies. This is not financial advice or a recommendation, and not a substitute for due diligence. 

Originally tweeted on June 19th, 2024.

This question came from loyal @marketswithmay Twitter/X followers.

Many are asking on the timing of an AMC debt restructure of the second lien debt (2L's). Here is my current thought process.

SHORT ANSWER: Given current conditions, my best guess is this will be another post-Christmas, pre-New Year surprise.

BACKGROUND INFO & WHY THIS IS MY GUESS HOW IS THIS DECISION MADE: First, there is no right answer. This is a purely CEO/CFO funding negotiation strategy question. It's not even a debt question. A banker or very seasoned legal person with a structuring background (aka Phil Lauder, who many of you, IMO wrongfully hate) would be leaned upon to help manage this.

WHAT DEBT NEEDS TO/IS LIKELY TO BE RENEGOTIATED/WOULD BE INCLUDED IN THE NEGOTIATION: While I have mostly focused on the 2L's, given how things currently sit it is also possible they renegotiate the entire dollar value of both the 2L's and the Odeon together. This is because these two pieces of debt are the ones that make it harder for the company to manage its balance sheet. These two pieces of debt have normal, but more restrictive covenants, namely, they disallow any share buyback or dividend activity. Hence, getting rid of both creates more uncertainty for any short seller in the market.

WHY CAN'T THEY REFINANCE THIS DEBT IN THE OPEN MARKETS & IF THEY WERE, HOW WOULD IT LOOK? 

Despite the 2L & Odeon rate being over 12%, it is still lower than if AMC were to replace it with unsecured debt. When posting on AMC Bonds, I always show you the current CCC- corporate bond rate vs AMC current unsecured debt rate. For a simple comparison on what might be an annual rate, one can use yield to maturity (YTM).

YTM is telling you what rate you'd likely get in the market if you were to refinance. CCC- corporate is currently trading at an implied rate of 16%. This is obviously far higher than both the 2L's and the Odeon. AMC debt, though would still have company-specific risk, i.e. Specific Risk. From a financial perspective, that is the extra premium you paid because that specific company has risk above what would normally be the case for CCC-.

Currently, that specific risk increases as time increases. This is because of the large payment due in 2026. AMC 2026's bonds currently trade at 22% and the 2027's at 24%. This is again is the result of the huge principal due in 2026 (the 2L's). Still, a refinance of the debt would likely still come in above 16%. It likely would not come in as high as the 2027's are currently trading, aka 24%. All things being equal that's how you'd look at what they would pay in interest payments if they did not do some more complex structure.

Hence, the negotiation will most likely be something other than just refinancing unsecured debt. This could be done via a convert. That rate might be as low as the 6-7% range. A convert would create dilution and at least 1 day of hedging-related short trading activity for the buyers. However, it would not create shares that could be used as a part of stock lending. This is because the shares would only be the result of the implied conversion in the convertible bond. They WOULD NOT exist in the open market.

Hence, you do not allow the shorts to cover even while creating new stock. Also, you can always buy the convertible bond back early to avoid dilution. Still, in any EPS or other calculation, you'd need to include the converted shares. The only other consideration is that the conversion would need to be covered in the company’s shelf offering. AMC - unlike most companies - has a bylaw that caps dilution.

WHY IS END OF YEAR MY BEST GUESS AT TIMING 

Ultimately, this is a negotiation (hence Phil Lauder's role on the board). At year-end, you do get tax loss selling. Since both fixed-income and equity markets are coming in pretty strong this year AND ALSO you'll likely have more corporate activity (buyouts of special situation companies), it's highly likely that the funds that hold the Odeon and 2L's will have reasonably high gains from other positions in their portfolio. It is common practice to look for losses to offset gains and lower the tax burden of investors in the fund.

Additionally, the actual prospects for AMC’s free cash flow (FCF) generation this year make it strategically smart to wait until after Q3. Q2 is likely coming in slightly better than expected. However, it could still be fcf negative. Q3 has been expected to be FCF positive. If it comes in even better than estimates (which is a possibility) then it will offset any seasonality in Q4.

My suspicion is that the estimates AMC is using for Q3 may be conservative. We won't know though until the summer sets in. If they believe they are conservative on Q3, they will likely wait to negotiate their hand until earnings come in. They might pay down additional debt and negotiate in Q4 with a stronger hand while also using tax loss selling to their advantage. 

Using tax loss selling as a part of debt negotiation would be tactically smart for AMC. Recall that because these bonds still trade at a discount, it may be possible to negotiate an agreement that looks like a taxable loss for these debt holders. As such, the offset to a debt holder might - from an accounting perspective - be a cash flow gain to them. As with the past two post-Christmas pre-releases, the negotiated settlement of debt may lower taxes by taking losses, but still provide upside to an AMC recovery.

Hence, I suspect that some part or all of the 2L's AND the Odeons will be considered at year-end. I also think they will use fcf from higher profits in Q3 to pay down debt. This is barring any covenants that disallow pre-payment on the Odeon debt. I have not gone through the Odeon Debt Covenants which follow a UK system (not US).

In this way, AMC could end up with a lower dollar value of debt (2L + Odeon), a slightly higher rate, and an overall decrease in interest expense. This is similar to when someone recasts their mortgage after paying a lot down. Even if the rate is higher, depending on how much you paid off, you are often able to keep monthly payments the same or even lower.

It is never easy to explain this sort of thing. Please let me know if this clarifies your question. And again, no one knows until we know. I could be very wrong because this is a purely strategic question. While it deals with the debt, it's not a debt question.

Link to original tweet: https://x.com/marketswithmay/status/1803454328004362394