Chinese billionaire-owned AMC could soon be filing for bankruptcy with its equity value falling to zero

14 Apr, 2020 07:28
source: Singularity Financial

Singularity Financial Hong Kong April 12, 2020 – by David Lee

The world’s largest movie theater chain AMC could soon be filing for bankruptcy.

With Wall Street judging a Chapter 11 bankruptcy filing for AMC Theatres increasingly likely, B. Riley FBR analyst Eric Wold on Monday (April 13) recommended investors sell off stock in the exhibition giant.

“We continue to believe that AMC has minimal liquidity options to make it through an extended theatrical shutdown period even with the recently reported decision to no longer pay rent on its theaters,” Wold wrote in an investors note as the company, led by CEO Adam Aron, tries to navigate theater closures amid the COVID-19 crisis.

Shares in AMC Entertainment Holdings Inc. were trading mid-afternoon Monday down 52 cents, or 20 percent, to $2.08 on the New York Stock Exchange. AMC, in which Chinese conglomerate Dalian Wanda Group owns a majority voting stake, has been looking for various ways to reduce costs, furloughing all of its 600 corporate employees, including Aron, in late March following the closure of all its cinemas.

AMC would be completely out of money by August

AMC reported $265 million in cash and equivalents on hand, plus $332 million available via lines of credit, as of Dec. 31, 2019. “AMC is the exhibition company we view with the least financial flexibility,” MKM Partners analyst Eric Handler wrote in his report. “We believe the company’s monthly cash burn rate in a no-revenue environment is running at $155 million per month, which likely keeps AMC liquid until June/July.”

All theaters have been closed since March 16 due to the coronavirus and aren’t expected to re-open until August. By that estimate, AMC would be completely out of money.

The stock fell sharply in the first week of March, along with other gathering places, and the new James Bond movie “No Time To Die” was postponed from April to November, the first big sign of change in the theater business. By the second week of March, the company announced that it would limit seating in its auditoriums to 50% capacity, a move that seemed to briefly lift the stock, as it was a sign that the company could continue to do business during the crisis.

Finally, the stock hit its nadir on March 17 after saying that all theaters would be closed for at least six to 12 weeks, as a number of states ordered movie theaters to close and the federal government recommended against gatherings of more than 10 people.

April has gotten off to an equally inauspicious start for the movie theater operator as the stock plunged 17% on April 1, according to a report in The Wall Street Journal that the company’s lenders have hired restructuring lawyers, a sign of AMC’s increased risk of going bankrupt.

The company’s equity value falling “to zero”

AMC is in talks to hire law firm Weil Gotshal & Manges to explore a potential Chapter 11 filing, a few media have learned.

Weil Gotshal’s team is headed up by lawyer Ray Schrock, who lately has worked as bankruptcy counsel to California utility PG&E, the Fairway supermarket chain, and retail icon Sears Holdings, many of whose stores got taken over by billionaire Eddie Lampert.

The insider cautioned that “it’s early stages” and that it’s not clear whether the theater chain has hired any other advisors for the possible restructuring. Nevertheless, a bankruptcy filing looks increasingly likely as the company has already begun to skip rent across its locations in April, according to the source.

“You don’t hire Ray unless you are filing,” the source said. “You are not going to hire them at their hourly rate to have a beer with them.”

Last week, AMC’s lenders hired law firm Gibson Dunn & Crutcher to advise the chain on a possible restructuring, according to the Wall Street Journal.

“Given a net leverage ratio that already exceeds 6.0x our current 2021 AEBITDA estimate and the relative lack of visibility into a recovery in moviegoing demand, we believe it is unlikely that AMC would be able to secure any additional availability on those credit facilities or that additional debt sources would be made available,” Wold wrote.

On April 1, B. Riley FBR said uncertainty around when those theaters may reopen threatened the company’s equity value falling “to zero.”

S&P Global on last Thursday downgraded its credit rating for AMC Entertainment to CCC- from B, which takes the company from “Highly speculative” to “Default imminent, with little prospect for recovery.”

S&P analysts wrote in a note. “We do not believe AMC has sufficient sources of liquidity to cover its expected negative cash flows past mid-summer, and we believe the company will likely breach its 6x net senior secured leverage covenant when tested on Sept. 30, 2020, absent a waiver from its lenders.”

Dalian Wanda Group owns a majority voting stake

The chain, in which Chinese conglomerate Dalian Wanda Group owns a majority voting stake, has been looking for ways to cut costs due to the crisis. In late March, it furloughed all of its 600 corporate employees, including Chief Executive Officer Adam Aron.

  

Back in mid-2012, Dalian Wanda Group agreed to buy AMC Entertainment for $2.6 billion, including debt, making it the biggest theater operator in the United States.

The deal was appraised by most media as “the largest overseas acquisition by a privately held Chinese company, reflects the warming ties between the U.S. and Chinese movie industries after China agreed in February to open its cinemas to more American films.”

The purchase also marked Wanda’s first investment outside of China and its first foray into the United States and Canada, the world’s biggest film market with ticket sales of $10.2 billion, comparing to $2.1 billion in revenue from Chinese that year.