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.
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
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
LTM EV/EBITDA: 17.23x
Debt Asset Ratio: 0.84x
Table 1: Capital Structure of AMC (Capital IQ)
Table 2: Bond Structure of AMC (Cbonds)
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.
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.
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
The combination of high-investments and low revenues, as highlighted by a negative Net Income Margin, can prove to be lethal to the company’s future. AMC is in a weak financial position due to a highly leveraged capital structure. It is highly likely that AMC will breach its 6.0x secured leverage covenant
The company has been facing liquidity issues and has only a limited amount to sustain itself amidst operating losses and cash interest payments. The company drew down $215 million from its revolving credit line and has taken debt restructuring measures involving a $550 million debt reduction and extension of certain maturities to 2021 in order to enhance its weak liquidity position and ensure business continuity
Risks and Uncertainties
Between the coronavirus pandemic and the alarming popularity of direct-to-streaming releases, the future of AMC remains bleak. In the near future, AMC is facing liquidity issues as many of their theatres are still closed. The liquidity crisis could potentially cripple the company’s 100-year history and cease operations.
AMC also faces a considerable amount of challenges if it reopens its theatres as scheduled. Weighing the current health scenarios, the willingness of movie theatre employees to work at the theatres amidst the risk of contracting the virus remains uncertain. Moreover, re-openings could also contribute to future COVID-19 outbreaks which would mean not only further closures but also possible legal action against AMC. The greatest of all risks include an irreversible shift in public perception and a possibility that even if the theatres remain open, the public still views them as a health risk, thereby causing financial damage to AMC.
In terms of compliance measures, AMC states capping ticket availability at 50% as its solution to maintain social distancing measures. In terms of re-opening protocols, AMC has found its way into a “Political Controversy” with company CEO Adam Aron declaring that the company would not require customers to wear masks. This decision has been met with widespread criticism from health activists and a trending hashtag #BoycottAMC, thereby pressuring the company to reverse its initial decision. Even if the company manages to revive 50% of its usual capacity, it would still struggle to meet its fixed costs. In order to stay solvent, AMC has been relying on the release of blockbuster films such as Mulan and Tenet to bolster their business. However, with Tenet”s release being delayed until September 3rd and Mulan being released on Disney+, the rug has been pulled out from under the company.
AMC’s theatre business as a whole faces further risks as they confront rising DTC releases. Movie theatres are reliant on film studios and the cinematic release of both large and small films alike. While big-budget films might continue having theatre releases, the more pressing issue for movie theatres is a growing number of smaller budget or mid-budget titles being shifted to DTC platforms due to a rise in consumer preferences for in-home streaming and the less profitable financial profiles of these film releases. Losing the smaller and mid-budget films on top of the other obstacles AMC is facing poses problems for the financial future of the company.
Will they be able to repay?
AMC’s $600 million bonds maturing in 2025 have fallen from over 90 cents to just 31 cents. Simultaneously, the company is holding a debt of almost $10.5 billion with just $300 million in cash equivalents. AMC’s financial troubles and liquidity crisis have been in the news since long before the pandemic hit. AMC’s already weak liquidity profile coupled with the negative financial effects of a global pandemic have generated doubt over the company’s abilities to repay its obligations. Even with the additional funds raised from the bond sales, AMC’s ability to avoid defaulting remains highly unlikely, especially if the situation of the cinema industry continues to deteriorate at its existing pace.