While I don't believe that AMC Entertainment (NYSE:AMC$AMC Entertainment(AMC)$ ) is inimminent danger of restructuring, it does appear to be in somewhat worse shape thanI previously thought.
I mentioned before that I believed that AMC washeaded for either restructuring or massive dilution of its stock. AMC is taking the path of massive dilution, but due to the fall in the price of AMC Preferred Equity Units (APE), it may not be able to raise enough money through issuing shares/units to avoid an eventual restructuring in the end.
I've modeled a scenario below where AMC's revenues increase significantly (approximately 25%) in 2023 compared to 2022. This is towards the high end of AMC's estimates for growth in 2023 and is significantly higher than theforecast from Gower Street Analytics.
This scenario would still result in it using up over $400 million in cash during 2023 due to interest costs and deferred rent repayments. In this scenario, AMC should be able to last into 2024 if it continues to issue APEs. However, slower revenue growth than 25% increases the risk of a 2023 restructuring for AMC.
Dilution
AMC notedthat it had raised $162.4 million in gross proceeds through the sale of 125.9 million APEs up to December 19. It currently appears to have approximately 643 million APEs issued and outstanding, and is currently authorized to issue up to 1 billion APEs.
The challenge for AMC is that APEs are trading at $0.67 per unit now, so if it sold another 357 million APEs, that may only net it around $235 million even if the price didn't go down further.
The plan seems to be to sell APEs until the unit price is too low to make selling more APEs an effective way of raising money. At that point, AMC will probably ask for a vote to convert the APEs into AMC common shares and increase the authorized amount of AMC common shares so that it can sell AMC common shares to raise more money.
Term Loan Interest Costs
AMC's term loan due 2026 (with $1.93 billion outstanding as of the end of Q3 2022) has an interest rate of LIBOR + 3%. LIBOR has rapidly increased from near zero (0.1%) in early 2022 to4.35% on December 16. This increase in LIBOR (from early 2022 until December 16) increases AMC's term loan interest costs by over $80 million per year.
Thus, if LIBOR remains at current levels, AMC will pay over $140 million in term loan interest in 2023.
Estimated Cash Position At End Of 2022
AMC estimates that it will have between $514 million and $614 million in cash and cash equivalents at the end of 2022.
AMC had $685 million in cash on hand at the end of Q3 2022. It spent $147 million in net cash after the end of Q3 2022 for its Odeon refinancing transactions. AMC also raised approximately $153 million in gross proceeds from the sale of 123.2 million AMC Preferred Equity Units between the end of Q3 2022 and December 19. It also repurchased around $36 million in outstanding debt principal for approximately $14 million in cash. It also acquired the 13-screen former Arclight Cinemas theatre in Boston for what seems to be an undisclosed amount.
Excluding the above items, AMC may end up with negative $90 million in cash flow in Q4 2022 (including term loan repayments and deferred rent repayments). This would be consistent with its expectations for having positive operating cash generation in Q4 2022, which is defined as cash generated before debt servicing costs and deferred rent payback. AMC's interest costs and deferred rent payback may add up to around $170 million in Q4 2022, so it would have $80 million in positive operating cash generation in the quarter if it ends up with negative $90 million in cash flow.
Interest Costs And Repayments
Due to the increased term loan interest costs, AMC is currently projected to end up with a bit over $420 million in interest payments in 2023 despite some debt repurchases.
AMC's Odeon Notes (with a 12.75% interest rate) have their first interest payment due on May 1, 2023. Since the notes were issued on October 20, 2022, the first interest payment will be slightly higher than subsequent interest payments due to it covering a bit over six months.
AMC's interest payments are more heavily concentrated into Q2 and Q4 (approximately $140 million in those quarters) compared to around $70 million in Q1 and Q3.
AMC also has $5 million per quarter in scheduled term loan commitments. It expects to pay $50 million in deferred rent in Q4 2022. If it pays off the rest of its deferred rent balance during 2023, that would result in repayments of approximately $36.5 million per quarter.
AMC's Interest Costs And Repayments (Author's Work From SEC Filings)
Thus, in a neutral operating cash generation/burn scenario for 2023, AMC could still use $588 million in cash during 2023 due to rent repayments, term loan repayments and interest payments.
Cash Position During 2023
I can agree with the argument that AMC's financial performance should improve significantly as more blockbuster movies reach the theaters, so I am modeling a scenario below where AMC's revenues increase significantly (roughly 25% growth) in 2023 compared to 2022.
AMC had operating cash burn of $172 million during the first half of 2022. Thus, I am going to assume that AMC's operating cash burn improves by $250 million for 1H 2023 compared to 1H 2022, resulting in projected positive operating cash generation of $78 million in 1H 2023.
The challenge for AMC is that it is projected to have $295 million in interest payments, term loan repayments and deferred rent repayments in 1H 2023. This results in a projection of $217 million in cash burn, leaving it with $347 million in cash on hand at the end of June 2023 before any further proceeds from issuing equity. This also assumes that AMC ends 2022 with $564 million in cash, which is the midpoint of its current guidance.
If AMC continues without restructuring and sees a $200 million improvement in operating cash burn for 2H 2023 compared to 2H 2022 (including the projected Q4 2022 positive $80 million operating cash generation), it would end up with $101 million in positive operating cash generation in 2H 2023. I've assumed that the year-over-year improvement in operating cash burn is higher in 1H 2023 due to the impact of Omicron on Q1 2022 results.
This would still result in $192 million in cash burn in 2H 2023, leaving it with $155 million in cash on hand before any further proceeds from issuing equity. Issuing its remaining authorized APEs (up to 1 billion total) would probably still result in AMC having less than $400 million on cash on hand by the end of 2023.
Notes On Valuation
The declining price of APEs makes it harder for AMC to raise the necessary funds to stave off an eventual restructuring. I consider AMC's common stock to be worth only a token amount since the above scenario with 25% revenue growth in 2023 still results in AMC having over $4.5 billion in net debt at the end of 2023 along with a combined 1.5+ billion APEs and AMC common shares. The current price of APEs is probably more reflective of the actual value of AMC's common stock.
I find AMC's first-lien notes due 2029 to be more interesting now that they are trading atunder 50 centson the dollar. I believe these to be a significantly better play on a box office rebound in 2023 and 2024 than AMC's common stock or preferred equity units. While certainly not riskless, the first-lien notes offer a 15% current yield and also rank ahead of AMC's common and preferred stock as well as nearly $1.7 billion in debt in the capital structure.
Conclusion
AMC is challenged by increasing interest costs, which are contributing to it having around $420 million in projected interest payments in 2023. As well, AMC needs to make $5 million per quarter term loan repayments and currently has a deferred rent balance of $196 million. Thus, even if AMC's operating cash generation improves significantly (such as a $450 million year-over-year improvement in 2023) and it sells the rest of its currently authorized APEs at $0.67 per unit, it would still end up with under $400 million in cash by the end of 2023.
Comments