AMC Theatres Raises $500 Million in Debt Through A Private Offering

By Seerat Sandhu (The Claremont Colleges), Michelle Santoso (University of Edinburgh), Shannon Keegan (Wake Forest University), Charlie Solnik (California Polytechnic State University), Cameron Caldwell (University of Glasgow), Chirag Gupta (New York University)

Overview of the Deal

AMC Theatres, the world’s biggest cinema chain, closed its operations earlier in the month of March due to the COVID-19 pandemic. The company raised $500 million in senior first-lien notes via a private offering in April 2020. The company stated that it was “generating effectively no revenue” and had “substantial doubts” about remaining in business.

AMC successfully completed a debt restructuring offer in the month of July. As per the Wall Street Journal, AMC restructured almost $2.6 billion of its debt with more than 87% of the senior subordinated noteholders participating along with a strategic investment with private equity firm Silverlake. The debt restructuring has enabled AMC to enhance liquidity and reduce its debt more than $550 million.

Credit Rating Agencies such as Moody’s and S&P Global have anticipated a negative outlook for AMC, which can also be reflected by their respective credit downgrades. Moody’s also predicted a high credit risk for AMC due to a halt in operations posed by COVID-19 and extenuating circumstances leading to a decline in people visiting theatres.

"The movie industry will struggle mightily in 2020"
Jeff Bock, Senior Box Office Analyst at Exhibitor Relations Co.

Macroeconomic Trends

Outside of the effects of the COVID-19 pandemic, expectations for box offices going into 2020 have not been great. Analysts were predicting a weak year for theatres due to developments in streaming platforms and a lack of big movie releases for the year. Streaming platforms such as Netflix, Hulu, and Prime Video have been experiencing a rise in viewership, prompting many major movie studios to consider releasing movies on Direct-to-Consumer (DTC) platforms, hampering the demand for movie theatre experiences. Apart from this, widespread business closures and large scale layoffs have resulted in rising unemployment levels in the USA. This has contributed to a fall in discretionary income which, when combined with the rising availability of streaming services, creates a predictably negative effect on revenues in the movie theatre space.

Notably, for movie theatres, declining case numbers in some places have led to re-openings. However, these re-openings are subject to stringent operating capacity and procedure guidelines, altering the usual cinematic experience. In areas with increasing cases, concerns have generated regarding theatre re-openings, with re-opening dates and major movie releases such as Disney’s “Mulan” being repeatedly pushed back. AMC, Cineworld Group, PNC’s Regal Entertainment Group and Cinemark Holdings Inc - some of the biggest players in the movie-theatre industry - have decided to stay closed until they have movies to show. This does not bode well for either the movie theatre industry or the key players who are already struggling to generate income post-pandemic.

“Elevated debt load and unavoidable fixed costs mean the company’s near-term financial flexibility will be severely challenged, as the coronavirus’ spread raises the possibility of a shutdown of all domestic theatres, decimating ticket revenue”
Amine Bensaid, Bloomberg Intelligence

Company Details

American Multi-Cinema (AMC) Entertainment Holdings, Inc. is a cinema chain operating 1000+ theatres and 11,000 screens globally. The American born company went public in 1983 and is listed on the New York Stock Exchange (NYSE: AMC). In 2012, the chain was acquired by the Chinese Wanda Group for $2.6 billion.

Founded in: 1920

Headquartered in: Leawood, Kansas

CEO: Adam Aron

Number of Employees: 40,162

Market Cap: $519 million

EV: $10.62 billion

LTM Revenue: $5.21 billion

LTM EBITDA: $616.3 million

LTM EV/Revenue: 2.04x


Debt Asset Ratio: 0.84x

Table 1: Capital Structure of AMC (Capital IQ)

Table 2: Bond Structure of AMC (Cbonds)

Credit Ratings

Table 3: Credit Ratings of AMC (Capital IQ)

AMC Entertainment’s credit rating was downgraded by S&P Global Ratings from CC to D as a response to the proposed debt swap which would make subordinated bondholders accept less than the original par amount of the notes. Moody’s assigned a B3 rating to the assigned $500 million first-lien notes offering along with changing the company’s probability of default rating to Caa1-PD from B3-PD.

The rating outlook could look stable if AMC can manage to reopen its theatres in August and revive its previous demand levels. But, with coronavirus cases soaring, stringent health guidelines and limitations on operating capacity, an upgrade in credit ratings remain highly unlikely. On the other hand, a downgrade in credit ratings could take place in the event of a bankruptcy filing, balance sheet restructuring, or a second distressed debt exchange, all of which seem highly likely taking current circumstances into account.

Projections and Assumptions

"The country's banking system is just overwhelmed with companies seeking additional liquidity at the moment. We're going to have to get liquidity from someplace if we, in our industry, have expenses and no revenue"
Adam Aron, CEO of AMC

Why was this deal done?

AMC’s already turbulent financial standing, as indicated by a Q4 2019 YoY growth of -13.13% as opposed to its Q1 2020 YoY growth of 18.29%, has worsened with the coronavirus pandemic. The company filed an 8K in June, stating doubts with respect to its continuity. The 8K was shortly followed with an earnings call reporting a $2.2 billion loss in Q1 2020. Furthermore, AMC also stated its inability to meet rent payments starting in the month of April as its revenues reduced to zero. Hence, the $500 million deal has been an effort to ensure business continuity.

The company closed at a net income of -$149 million last year before the coronavirus pandemic began affecting sales, creating much room for investors and industry executives to doubt whether they will be able to avoid bankruptcy. The $500 million bond issuance has been made after the Federal Bank’s measures to support high-yield bonds in order to help companies like AMC gain access to required funds and thrive amidst such conditions. It can be assumed that the money generated through the bonds will serve as a method for AMC to quickly improve liquidity in the short term, putting the company at a highly precarious position.

Short-term Analysis

AMC, after drawing down money from its revolving credit lines, declared that it had enough money to last until July. The $500 million dollar debt issuance allows the company to gain enough liquidity to survive amidst stoppage of global operations until Thanksgiving. The company stated in its April SEC filing that securing the $500 million senior-notes offering and waivers from its revolver lenders would help avoid breaching of its 6x secured leverage ratios.

Evolving customer sentiments and preferences are making way for never-seen-before deals and M&A opportunities. The pandemic has created a rare window of opportunities for outsider firms to gain entry into the movie theatre industry through a well-timed deal. Amazon has been reported to approach AMC for a potential deal. Although the proposal of this acquisition has been rejected, the movie industry is indeed seeking such unconventional solutions to ride out the pandemic. Hence, it is possible for AMC to use M&A as a strategy to overcome its financial troubles in the near future.

The AMC-Universal agreement shortening the theatrical release window is another unique solution adopted by the company to deal with unusually low revenues. Although the agreement is detrimental to the movie theatre industry as a whole, the agreement allows AMC to gain up to 20% of the total revenue generated by the Premium Videos On Demand (PVOD). This would allow AMC to share Universal’s revenue from the increasing popularity of digital streaming, which are otherwise viewed as the company’s competitors in the industry. Additionally, company CEO Aron notes that AMC will “share in these new revenue streams” and get a cut of the early movie rentals released as PVOD.

Long-term Analysis

In the long-run, AMC would need more than just revenue from bond sales to sustain itself. Although the AMC-Universal Agreement secures some revenue security for the company in the short-run, the long-term effects of the deal alter its performance. A potentially permanent shift in consumer preferences from a comparatively expensive cinema experience to a more pocket-friendly digital streaming alternative could endanger the existence of Cinemas altogether, potentially making AMC lose its client base in the long-run. Apart from this, AMC must still account for the increasing popularity of streaming releases from other production studios besides Universal Pictures.

AMC was able to generate some revenue despite a severe lack of releases through its subscription plan (Stubs). However, a lack of releases along with a fall in consumer income will affect the revenue generated from the Stubs programme in the long-term. Hence, AMC will have to find new ways to generate revenue than the Stubs program which has been helping the company stay afloat amidst the coronavirus crisis.

AMC’s fate of defaulting still has the potential of a turnaround in the long-run if the company can continue to find ways to strengthen its financial situation. The company has taken methods to reduce its debt load, increase its cash and extend its maturities. Successful implementation of the default swap causing a 52% reduction of its total debt through the Senior Subordinated notes can be considered as a step in the right direction. In order to navigate its way through the pandemic, AMC will also have to take measures to significantly reduce its operating costs and capital expenditures. However, with its bonds (maturing in 2025) dropping in value and credit rating agencies rating AMC’s bonds below investor grade, AMC’s future prospects remain bleak.

Financial Ratio Analysis

Table 4: Financial Ratios of AMC (Capital IQ)

  • AMC’s ROA and ROC have been declining since 2015, thus indicating a constant reduction in the company’s profitability due to the entry of streaming services. A fall in ROA from 3.1% in 2015 to 0.7% in 2020 is reflective of the company’s inability to squeeze any revenue from its existing assets