AMC - AMC Entertainment Holdings

[Guest roark33]

Wasn't it just weeks ago when everyone got super excited because management bought some stock? My general rule of thumb is to tread very, very carefully with anything(excluding real estate companies obviously) that has >50% of its EV in the debt column. And never touch anything where its greater than 75%.

 

If you start with that sort of capital structure handicap, you're behind the ball. If you dont start there, and end up like that, then you're obviously doing a pretty shitty job or the business just sucks. At $6 or whatever when management was buying, this was what? 90% debt on the EV side? Why even bother? You rarely hear of companies who's capital structure consists of 100% equity ending up like this...

 

Mgmt didn't technically buy stock, but they did take half their cash comp in stock options with strike prices in the teens, but that was right before the virus came, so....

[given2invest]

Adam Aron bought stock at like 18 a few years ago too and bragged about it on a conference call.

 

He's the clowniest of clowns.  I'm guessing he's the first one the bondholders throw out in Chap 11.

[5xEBITDA]

The bonds are at 30 cents on the dollar. That's what you guys should be looking at.  If it trades up to par somehow (don't know how) but you get 3x.  If it files, you could potentially end up with the equity.

 

My rule of thumb is that I stop looking at equity when I can get hold of bonds of the same name at <50c on the dollar.  At 30c on the dollar, the bonds have become basically equity and the stock has become a far out of the money call option.

 

I heard that during BK, even if you are a (minority) bond holder, you can still be robbed by the big holders by not allowing you participate. Have that happened to you before?

 

Lots of ways to get screwed by being a minority creditor. If I had to guess, minority bond holders likely get screwed in this particular case by not being allowed to participate in a rights offering or something. Even large bond holders can get screwed if the process is heavily driven by senior bank debt creditors, which this likely will be.

 

On another note, for as much work as I've previously put in to AMC I think I'm going to stick this one out. I'm not super bullish on the sector's outlook after this virus mess, and at best I think you'd be converting bonds into the equity of an, admittedly de-levered, melting ice cube. The aftermath of the virus is going to have several implications here. I don't think this is going to be an industry that bounces back with a V shaped recovery. Theaters are cramped, already have an "eh" feel to them, and I suspect people will think twice about going due to germ issues. This lowers your attendance, and you'll have to lower ticket pricing to make up for the loss of demand. There is also a ton of theater capacity out there which will likely be over-supplied now, so having to cut that will be another problem. In order to keep attracting people and keep an aura of feeling nice, theaters will have to maintain their renovation programs - reclining seats, better food, bars, etc. - all without the benefit of being able to raise ticket prices to pass these added costs to customers. This also means that what was previously "growth" capex will now solidly be "maintenance" capex. I just think its really hard to win here. You're going to lose top-line, lose margin, and grow capital requirements here. Bad deal in my opinion.

[dbuch]

Bond holders mostly get screwed by being primed with higher secured debt or diluted with pari passu debt, cash or assets allowed to leave the restricted subs, etc.  A hedge fund could own the fulcrum security and the senior debt and push for equity at the unsecured etc. you want to own the fulcrum security that will be a loan to own and get the equity. Not always and easy thing to figure out. 

 

AMC has tapped their existing secured capacity and the unsecured market is basically shut off for them.  So the unsecured at 30 cents is saying they don’t expect much recovery or any gov help.

[Guest roark33]

CNK raised 250m today.  I don't think it is unrealistic that AMC could tap the debt markets here.  It would be expensive, but under their debt documents, they have substantial amounts of flexibility.  I just don't know what price they would need, probably 15% and warrant coverage.  Significant dilution, but it might get done. 

 

They have significantly reduced their cash outflows, but the real question is how bad the rest of 2020 turns out to be, since they may actually lose more money once they open up, since they will have to start paying rent again. 

[given2invest]

Their debt is trading at 30 cents on the dollar.  How do you suppose they could issue debt at a 15% coupon?

[dbuch]

They have a 6x secured leverage covenant which will be tested in Sept and they won't be below that. I don't think they could issue secured debt at this point and unsecured is yielding 33% ytw so the market is not open for them. CNK unsecured's are 11% so the bond market is pricing in bk for AMC.

[dbuch]

At 8x EV/EBITDA, AMC equity ought to be worth $10 but unlikely they get valued that high. At 7x equity is $4 and at 5-6x equity gets nothing and unsecured would be worth 90 cents.

[given2invest]

Silver Lake obviously knows this business cold.  If they thought there was money to be made anywhere in the capital structure I would think they will step up and infuse capital.  I'm doubtful.

[5xEBITDA]

SilverLake won't put new money in, at least not to prevent a bankruptcy. Their convertible bond is senior to the subordinated bonds that trade in the 30s which makes SilverLake the fulcrum security behind the bank debt and probably money good. Subordinated bondholders are likely getting minority equity, equity only in the form of warrants (nuisance equity), or nothing.

[jeffsreng]

I wouldn't use EBITDA. 

[given2invest]

Silver Lake pref is senior to subordinated debt?  I believe you but just surprised. 

[dbuch]

The SilverLake convertible is $600mm + $2500mm secured debt + $3000mm unsecured. If i assume 5x EV/EBITDA and EBITDA is lowballed at $750 then the whole business is worth $3750mm. Silverlake and secured get paid in full and unsecured gets equity.

 

I could just invert and ask is the whole business worth less than $3.1B (convert +secured). If I assume zero debt that adds back $300mm in interest and FCF would be at least $500-$600mm.

 

It would seem the unsecured are the fulcrum security to me. 

[Guest roark33]

AMC is going to "prime" the unsecureds with an increase in the senior secured lending facility, either from the 1P lender or a different group.  That is, if they need the cash.  Given the decrease in cash burn, I am not sure they need the cash immediately. 

[5xEBITDA]

Silver Lake pref is senior to subordinated debt?  I believe you but just surprised.

 

Yeah, its a convertible bond not preferred equity or anything. Indenture says senior to subordinated debt and see some analysts agree

[5xEBITDA]

The SilverLake convertible is $600mm + $2500mm secured debt + $3000mm unsecured. If i assume 5x EV/EBITDA and EBITDA is lowballed at $750 then the whole business is worth $3750mm. Silverlake and secured get paid in full and unsecured gets equity.

 

I could just invert and ask is the whole business worth less than $3.1B (convert +secured). If I assume zero debt that adds back $300mm in interest and FCF would be at least $500-$600mm.

 

It would seem the unsecured are the fulcrum security to me.

 

Using your numbers - $750 million EBITDA at 5x EV / EBITDA yields $3.75 billion. Ignoring likely additional secured debt such as DIP super priority claims and admin fees we'll use $2.5 billion secured debt plus $600 million SilverLake bond plus $3.0 billion subordinated debt for a total $6.1 billion claims.

 

Secured debt gets a full recovery with ~150% coverage of face value, this leaves $1.25 billion residual value for the SilverLake bonds. SilverLake bonds are covered at par at ~208% of face value, this leaves $650 million residual value to the subordinated bonds. Subordinated bonds are covered at ~22% face value which leaves the equity out of the money.

 

So far you have these recoveries:

 

Secured Debt - 150% (Unimpaired)

SilverLake Bond - 208% (Unimpaired)

Subordinated Bonds - 22% (Impaired)

 

So the next step of the analysis is putting a new capital structure together. AMC's prior debt level was too high, so lets say the new capital structure is levered at 3.0x. This isn't too crazy given 1) EBITDA and cash flows are going to be impacted, and 2) Cinemark just issued new debt today with a pro-forma leverage ratio of 1.3x, so it could be a little aggressive for the circumstances even. This means that out of $3.75 billion enterprise value, total debt is $2.25 billion.

 

Senior creditors prefer getting debt recoveries (because primarily held by CLOs, etc.) so they'll receive the majority of their claim with $2.25 billion worth of debt securities and the $250 million balance with new equity. There isn't any more debt to be allocated, so the SilverLake bond gets their $600 million recovery entirely in the form of new equity. The bonds also receive their $650 million recovery in the form of new equity.

 

Form of consideration distribution looks like this:

 

Secured Debt - 100 cents total recovery. 90 cents new debt, 10 cents new equity

SilverLake Bond - 100 cents total recovery. 100 cents new equity

Subordinated Bonds - 22 cents total recovery. 22 cents new equity.

 

Pro-forma equity ownership:

 

Secured Debt - 16.7%

SilverLake Bond - 40.0%

Subordinated Bonds - 43.4%

 

So in this illustration it is entirely possible for the subordinated bonds to become the fulcrum equity and come out with majority equity ownership. However, SilverLake has negative control in scenario which is likely a negative for the subordinated bond owners.

 

This isn't a perfect illustration and lots of things can go lots of different ways. For example, we excluded a DIP and administration fees which 1) reduces gross recoveries for all non-super priority classes and 2) increases the amount of new equity the secured debt will have to take (since admin claims / DIP are paid with cash). These two things will reduce the recovery of the subordinated bonds below 22 cents and also reduce their pro-rata ownership of the new equity as well. Although I suspect the subordinated bonds may try to increase their ownership of equity by putting together a rights offering plan, who knows how that will go. I think it will be a highly contested bankruptcy given the varying classes of creditors as well as the biggest "dont know" in my opinion which is if some vultures have been buying up to secured debt and will attempt a take under (very, very bad for subordinated bonds).

 

This doesn't even begin to get into the problems with figuring out what an appropriate set of financial projections will be for the bankruptcy, valuation multiples, and also doesn't discuss how you settle unsecured creditors / landlords (hint: hurts subordinated bonds).

 

Note: I should add that I use a slightly different definition of "fulcrum security" than what I think is common. I've seen this term used most commonly to refer to the security that gets equity ownership in a restructuring. I tweak just a little bit to define it as the security that gets the most equity in a restructuring because the control premium is so valuable here. Being a minority shareholder isn't fun.

[Foreign Tuffett]

Thanks for taking the time to write that up 5xEBITDA. You are an asset to this board.

[Guest roark33]

I think the filing eventually happens as 2020 plays out and the cash flow just isn't there because of lack of rebound in attendance, but that is probably a long way from here.  They don't have a real liquidity problem immediately given they have stopped paying rent.  I am just saying, this could take a lot longer, and AMC has a longer runway than I thought a few weeks back. 

 

Also, Weil is always counsel for AMC in all their past debt deals, so hiring Weil is probably not as meaningful as I thought at first.

[dbuch]

Agree that this is not a simple analysis or that it is a sure thing the unsecured get all the equity but typically the first impaired asset is the fulcrum security. Secured and Silverlake have little say in the matter if they are made whole. The company has survived for a long time with 4-5x debt to ebitda levels so just because secured and Silverlake want equity and want lower leverage doesn't make it so. Also the EBITDA is conservative as is the multiple in this scenario.

 

But even so 750 x 5 = 3750 so very little probability senior secured gets equity, they get par. Even if the rest was equity that would be only 3.3x gross debt which is substantially lower leverage.

 

Assume $300mm DIP and admin costs and 4.5x leverage, secured gets par debt, Silverlake gets $500mm par and the $100mm equity and unsecured gets equity.

 

If the business is valued at 5x which is very low to historical valuations then Silverlake gets 30% and unsecured gets 70% of the equity.

 

If instead we assume EBITDA is $850 and a fair multiple is 7.5x, everyone is made whole and equity is worth $6. So obviously there is a lot of unknowns.

 

[5xEBITDA]

Haha yep exactly my point, this is gonna be a classic valuation fight :)

[given2invest]

Just want to remind everyone this was a sub $10 stock and a troubled company *before* Covid.  The debate is not over whether US theaters are in secular decline *before* Covid.

[Gregmal]

These big pops on favorable short term news seem like obvious entry points for a short. Frankly, I dont see how its possible to lose money if you put on some sort of long bond, short stock trade, with consideration to weightings of course. There's really no chance a company like this, with the debt load they carry, doesnt eventually file.

[5xEBITDA]

AMC Entertainment Holdings, Inc. Announces Proposed Private Offering of First Lien Notes

Company Release - 4/16/2020 7:14 PM ET

LEAWOOD, Kan.--(BUSINESS WIRE)-- AMC Entertainment Holdings, Inc. (NYSE: AMC) (“AMC”) announced today that it intends to offer, subject to market and other conditions, $500 million aggregate principal amount of first lien notes due 2025 (the “Notes”) in a private offering that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).

 

AMC intends to use the net proceeds from this offering for general corporate purposes, including further increasing AMC’s liquidity.

 

http://www.investor.amctheatres.com/file/4171292/Index?KeyFile=403639618

[Guest roark33]

Will be really interesting to see where these notes price.  PIK features....probably

[Guest roark33]

The following is from Mittleman.  I think he is off his rocker, but thought I would post nonetheless:

 

April 13, 2020         

 

AMC Entertainment Holdings, Inc. – AMC ($2.60)

 

Estimated fair value reduced from $25 to $20 on COVID-19 impact

 

Bankruptcy plausible yet avoidable; we believe equity unimpaired regardless

 

 

 

Estimated fair value = EV/EBITDA multiple of 10x est. 2021 EBITDA of $810M (15% EBITDA margin on $5.4B sales) which is EV of $8.1B, - $4.6B net debt ($4.73B long term debt + $100M capital lease + $225M revolver + GBP100/USD125M credit line = $5.18B total debt - $590M cash = $4.6B net debt, excl. $600M convertible), - $55M pension liability, -$520M est. cash burn (3 months (3/15/20 to 6/15/20) at $155M per month +$55M int. payment 4/22/20) = $2.94B equity, divided by 147.44M shares outstanding (includes 43.2M from convert at $13.89) = $19.91 per share = market cap. / FCF multiple of 12x estimated $250M in free cash flow for 2021. 

 

As part of the global effort to contain the COVID-19 virus, a worldwide shut-down of movie theaters began on March 16, 2020.  AMC then drew down the remaining availability on their credit lines here and abroad, taking cash on hand up from $265M on 12/31/19 to $590M.  A credible estimate suggests that AMC will burn $155M per month in cash ($38.75M per week) while it has zero revenues, and pay $55M in interest on 4/22/20, implying 3.5 months until the cash runs out, which from the 3/15/20 starting point implies a 6/30/20 limit until existing liquidity runs out.  AMC’s CEO, Adam Aron, gave a rough estimate of $30M per week in costs in a 3/20/20 TV interview (CNN, Quest Means Business), so the situation might be better than we estimate here. 

 

To maximize their resources, it’s been reported that AMC stopped paying rent beginning in April, which cuts the cash burn substantially, by $80M per month from $155M per month to $75M per month, more than doubling their runway from 3.5 months to 7.1 months (10/18/20).  We still deduct the full $155M per month cost (with rent included) from our equity fair value reduction because the deferred rent will likely be paid at some point.

 

If we assume theaters reopen on 6/15/20 after 3 months of closure, AMC will have incurred a cumulative $520M in cash burn ($280M without rent paid), leaving $70M cash left in the bank ($310M without rent paid), and the company would return to free cash flow generation shortly thereafter.  We assume that by 2021 the business will have returned to normal. 

 

Rumors appeared in the press late last week that AMC was close to filing for bankruptcy.  We view such talk somewhat skeptically because the company has breached no debt covenants, missed no interest payments, and has no major debt maturities until 2024.  That said, a covenant breach is likely if trailing 12 months EBITDA is less than $543M, which should happen later this year.  But for such a breach, the cure would normally be a negotiated covenant relief whereby the lender gets a higher interest rate and/or a one-time payment, especially with a recovery to a more normal cash flow profile highly likely in the very next year.  So why is chp. 11 a rumor?

 

The company is solvent, with 12/31/19 assets of $13.68B, liabilities of $12.46B, and equity of $1.21B, and beyond those debatable book values it was acknowledged as such by AMC’s CEO, Adam Aron, on the aforementioned CNN International TV interview on 3/20/20 when he stated, “…we’re a very solvent company, so that’s not the issue, it’s just a liquidity issue…”  We think it would be very difficult for a CEO to justify a plan of reorganization that impairs equity holders after such a statement.

 

And yet, solvent companies sometimes do file for bankruptcy to stave off creditor remedies during a liquidity crisis, with the key difference versus most bankruptcies being that a highly solvent company will usually see its shareholders’ equity emerge from a bankruptcy reorganization unscathed, or at least mostly intact. 

 

A high-profile example was General Growth Properties (GGP), the large owner/operator of shopping malls which lacked cash and couldn’t refinance a $900M debt maturity in 2008 during the credit crisis and filed for chp. 11 shortly thereafter.  The stock price fell from over $12B in market cap. at around $36 in early 2008, to as low as $0.21 ($100M market cap.) later in 2008, as it approached and entered bankruptcy.  Bears claimed that malls were a dying business and that the Great Recession would only accelerate their demise, while bulls claimed the company was highly solvent (assets worth more than liabilities) and the stock would recover.  The bulls won the argument as the stock was over $20 again (more than 100x its $0.21 low of 2008) by 2013.

 

A more recent example is the utility company in California, Pacific Gas & Electric, now known as PG&E Corp. (PCG $12), which filed for bankruptcy in October 2019 on its expected inability to pay claims against it for the wildfires their faulty power lines allegedly sparked. The stock crashed from $70 in 2017 to as low as $3.55 in late 2019 after the news, but since the company’s assets appear to exceed their liabilities the stock is now $12 while the bankruptcy case is ongoing.  PG&E had already filed for bankruptcy 18 years prior in 2001 for a different set of circumstances, and the stock dropped from $35 to $6.50 but survived intact.  The law firm representing PG&E in both the 2001 and 2019 bankruptcy filings was Weil, Gotshal & Manges LLP, which is the law firm that AMC is rumored to be considering hiring.

 

That same law firm also represented Carmike Cinemas (CKEC) in their bankruptcy beginning August 2000, which saw the stock price collapse from $8 to $0.20 that year, only to fully recover and then some (40x the low price) by 2004.  The company was solvent, but needed (wanted) to reject a large number of uneconomic leases, which bankruptcy allowed, and the pre-petition equity value was recovered because the firm was solvent.  The court approved a reorganization plan that valued Carmike at $585M, roughly 8x EBITDA of $75M in 2001.  While it seems like a big win for shareholders it was actually an unfair deal (in our opinion) for CKEC’s pre-petition common holders because the preferred shareholders got much more value than they deserved, and management awarded itself more stock then they deserved for “successfully” navigating a bankruptcy process that better management could have avoided.    https://www.abi.org/abi-journal/a-hollywood-ending-for-pre-petition-equity-interests

 

That Carmike Cinemas case from 2000-2002 highlights a very powerful reason why AMC might choose to file chp. 11 even if they could avoid it (as I believe they can), and that reason is the ability to reject uneconomic leases for far less than breaking the leases would cost outside of a bankruptcy process.  If pre-petition equity holders of AMC benefit from that maneuver and are not otherwise abused in the process, it could be value-enhancing bankruptcy for current shareholders.  But given the likely $100M in costs (paid to lawyers, bankers, etc.) that a bankruptcy the size of AMC would incur, any strategic goals along those lines would have to be very high ROI to justify that cost if it is avoidable.  Unless such a cost/benefit is made apparent, we prefer any restructuring of the balance sheet be done via an out-of-court consensual arrangement, if at all possible.

 

And again, if an out-of-court solution is not achievable, then a bankruptcy filing should not result in an impairment to AMC shareholders’ equity.

 

Another great example of why that is the case would be the bankruptcy of U-Haul parent company AMERCO (UHAL $278) which saw its stock price drop from $17.10 on 12/31/01 to $1.24 on 10/24/02 after missing a bond payment (due to an accounting scandal, exacerbated by family-infighting over control), the company ultimately sought bankruptcy in 2003 and actually saw its share price jump 76% from $3.71 to $6.37 on the news of the 6/20/03 chp. 11 filing because the Chairman & CEO, Joe Shoen, who was also the largest shareholder (17%), confirmed that shareholder equity would not be impaired in the press release announcing the filing:  “Additionally, since the Company is solvent, with asset value in excess of its debt, AMERCO intends to repay its creditors in full, pursuant to a full-value plan of reorganization, without diluting the interest of its shareholders.”

 

Often times in these liquidity crisis bankruptcies where the corporation is clearly solvent, the difference between a fair and unfair deal for shareholders is the presence of a large interested shareholder to stand up for shareholders’ equity against overreaching creditors and/or management.  We had such a circumstance with GSI Group (GSIG), which is an industrial laser manufacturer now known as Novanta (NOVT $81.50). We started buying it at $10 in 2007, and bought even more at around $1.00 in 2009 as the company careened into bankruptcy.  We were convinced it was solvent with substantial equity value, as was a larger shareholder who appeared on the scene after us, Stephen Bershad, who I had read about many years earlier and admired immensely.  He led the charge for maximizing the recovery for shareholders, which would have been miniscule under the original plan had he not intervened to lead a rights offering in which we participated that secured a vastly better outcome.  So, what started out as a 90% loss from 2007 to 2009 ultimately became a big winner at a 275% gain, 25% CAGR over 6 years (from avg. cost $2.00 to avg. exit $7.50 from Sept. 2007 to Sept. 2013), despite an unplanned trip into bankruptcy in 2009-2010.

 

We think AMC’s shareholders can look to Wanda Group with their 50% equity stake (diluted to 30% if Silver Lake’s $600M convertible bond converts at $13.89 per share) to advocate for the protection of shareholders in any potential bankruptcy, or avoidance thereof.  Wanda has two seats on the AMC board including the Chairmanship, a position their appointee reassumed in December 2019 after a nearly two-year hiatus (he had been COB from 2012-2018). 

 

AMC turns 100 years old this year, and we’re highly confident it will make it to 101 with the current capital structure largely intact.  The company is seeking gov’t loan guarantees, but even if such loan guarantees are not forthcoming, we think rescue / bridge financing will be made available on tolerable terms, perhaps even from a studio like Disney.  What should happen does not always happen, but there are ample examples of how similarly situated corporations saw their equity holders kept either completely intact or largely unscathed by the bankruptcy process, except for a temporary and often harrowing stock price decline in the days leading up to the filing and/or immediately after the filing.  Toronto, Ontario saw a strong rebound in movie theater attendance after SARS in 2003 shut down theaters for two or three months.  We think a similar if not stronger rebound is likely, globally, after COVID-19 is subdued.