Latest Post

You can get free trees to plant in your Sacramento home or business. Here’s how EA Sports College Football 25 ratings for Texas Tech football players
Can AMC escape penny stock hell in 2024?

AMC Entertainment (NYSE:AMC) shares have traded in penny stock hell for all but 14 days so far this year. Aside from a few brief breakouts, like when they rose 135% in two trading days, meme stock investors hoping for a 2021-style revival are unlikely to get their wish.

Although I’m the last person on earth who would write something positive about AMC stock – I recently called it “radioactive” – ​​part of my job as a writer is to examine potential events that could turn a toxic stock into a must-own security.

As I scour the internet for a possible catalyst that could pull AMC out of penny stock hell, there doesn’t seem to be anything obvious that I can rely on as evidence that the turnaround is imminent.

However, Bloomberg recently reported on the company’s efforts to reduce its debt and postpone upcoming maturities in order to reduce short-term pressure on the company.

Although this move seems to me like rearranging the deck chairs on board the Titanic, it seems to be the best and only solution for the company to escape penny stock hell.

Here’s why.

A short-term solution for AMC shares

According to Bloomberg, the company had about $4.5 billion in long-term debt on its balance sheet as of March 31.

Of the $4.5 billion, 64% is due in 2026, according to the 10-Q report for the first quarter of 2024.

It consists of a $1.9 billion senior secured credit facility loan bearing interest at 8.435% and 10%/12% Cash/PIK Toggle Second Lien subordinated notes due 2026 (if the in-kind option is elected). 12% interest will be added to the balance of the notes.

Finally, there is a small amount ($51.5 million) in subordinated bonds bearing an interest rate of 5.875%.

The first two debts are the ones the company wants to get rid of the most. The annual interest payments on these two debts are about $255 million. In 2023, the company’s total interest expense will be $411 million.

If $255 million had been deducted from interest payments in 2023, the operating profit would have been $181 million instead of an operating loss of $74.3 million.

The only problem is that the nearly $2.9 billion in debt isn’t just going away.

However, the Bloomberg article points out that of the $951 million in 10% notes mentioned above, AMC could convert $164 million (plus $6.9 million in accrued interest) into 23.3 million shares of the company’s stock, bringing total outstanding debt closer to $4.32 billion.

If he can repay the 2026 debt for another 5 to 10 years at a lower interest rate than 8.435 to 10%, it will reduce the interest expense and give him more time to find a permanent solution.

The downside of such an agreement

When considering a company’s total debt, not only bonds come into play, but also liabilities from operating leases.

At the end of the first quarter, AMC’s total debt was $8.99 billion, compared to $10.75 billion at the end of 2021. As a result, net debt also decreased from $9.16 billion at the end of 2021 to $8.37 billion as of March 31.

That’s good news, isn’t it? Absolutely. However, the leasing payments are far more burdensome than the interest on the long-term debt.

According to the 10-Q report for the first quarter of 2024, the annual minimum payments for operating leases between 2024 and 2029 will be $4.42 billion, or an average of $736 million per year.

The company cannot forego these payments – I am by no means a credit expert – because I am convinced that otherwise the company would probably breach some of its long-term debt obligations.

While postponing the repayment of long-term debt may reduce a payment problem, it does nothing to alleviate the liquidity problems created by the leases, which affect the company’s ability to pay interest on its debt.

It is the classic case of “chicken or egg”.

You could close theaters, which would lead to lower lease payments, which would lead to lost revenue and a decline in potential cash flow, which would in turn upset lenders and bring debt problems back to the forefront.

Can it escape penny stock hell?

My opinion on AMC remains the same.

The theatre will not be able to overcome its difficulties without finding new sources of income beyond those normally associated with the theatre, such as ticket sales and the sale of food and beverages.

Higher prices have allowed movie theater chains to stay in business, even though ticket sales themselves have been declining since 2002. That year, 1.58 billion tickets were sold at an average ticket price of $5.81, 46% less than the 2024 average of $10.78.

While I would never say never, I can’t imagine ticket sales ever returning to 2002 levels. That means that no matter what AMC does to restructure its debt, it will continue to fight an uphill battle that it is bound to lose.

This is why penny stock status has become the norm for AMC shares.

At the time of publication, Will Ashworth had no position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Disclosure Policy.

Will Ashworth has been writing about investing full-time since 2008. Publications in which he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Leave a Reply

Your email address will not be published. Required fields are marked *