You know you’re at least a very niche type of cool when people are lining up to buy your junk.
With AMC Entertainment back on what appears to be a relative hot streak, CEO Adam Aron took his shot on the first step of his plan to refinance the cinema-chain operator’s roughly $5.5 billion debt load, announcing Wednesday morning that AMC had commenced with a $500 million junk bond offering, which Bloomberg later reported was increased by nearly double to about $950 million.
The label “junk bonds” isn’t a value judgment. These are high yield corporate bonds being offered by a company with a CCC+ credit rating from S&P Global Ratings, and a lot of debt. The new financing was expected to price at a yield in the 7.5% range and replace existing 10.5% coupon debt borrowed earlier on during the pandemic.
Plainly spoken, this appears to be some popular junk.
The company’s intention to refinance its debt has been openly discussed by Aron, who even tried in the summer of 2021 to capitalize on AMC’s meme stock momentum by issuing more shares, only to have that attempt rebuffed by retail investors who by then owned the majority of AMC’s free float and did not want their shares diluted.
Faced with being spurned at the dance by the people who brung him, Aron was not shy about how AMC’s debt needed to be addressed somehow even while he sold popcorn, kept courting his “Apes,” reopened theatres, and sold more popcorn.
“In 2022 I’d like to refinance some of our debt to reduce our interest expense,” Aron tweeted on Jan 3. “Push out some debt maturities by several years and loosen covenants.”
Although AMC shares have dropped off almost 75% since the summer, it came into Wednesday on a three-day streak of gains, and disclosed Tuesday that revenue has soared back from pandemic lows to give Aron some major breathing room on his balance sheet.
And while we’ve predicted that Aron would maybe go for a convertible bond to refinance himself out of the debt situation, he apparently chose to go a different way, using junk bonds to get a better rate on the more expensive stuff first.
In some realities, the optics of a theater chain emerging from a global pandemic that also accelerated the entertainment business’ transition toward a streaming video model, now offering junk bonds to pay off expensive debt, while dealing with a super-volatile stock price, might be considered a tough sell, even to the most vulture-ish debt investor.
On the other hand, the terms of the bonds have a solid quality and a nice yield you don’t find in just any junk.
Still, like many of the big moves that Aron has pulled off in the last 13 months, Wednesday’s big junk bond refinancing was made with the tacit acknowledgment that AMC is not a normal company, and that its meme powers can create some behavior that markets are not used to seeing.
Another upside of junk bonds is that they don’t dilute shares, AMC closed down almost 8.5% on Wednesday despite the apparent popularity of the offering, which might be more of a growing move by less zealous investors to cash out of meme stocks as 2022 market reality takes shape.
As evidence of that point, shares in GameStop were down more than 11% on Wednesday, which is less of a concern to that company’s chairman, Ryan Cohen, who already used his meme stock potency to massively reduce GameStop’s problematic debt situation in 2021.
Even with more hot air coming out of the meme stock balloon, Wednesday’s offering is a canny attempt to finally do what Cohen did and strike while the iron is still warm, making it clearer that even if AMC’s stock price falls back into the single digits, it can still use what happened in 2021 to survive beyond 2022.
Melvin Capital: Curb your lack of enthusiasm
News that hedge fund Melvin Captial lost 15% in January was met with glee by Apes on social media who still see the fund’s founder Gabriel Plotkin as one of their existential enemies in the quest for MoASS, ie the Mother of All Short Squeezes.
But while any bad news for Plotkin and his crew is seen as another successful battle in the campaign against the hated “shorts,” the Reddit crowd might want to take a step back and reassess if Melvin Capital’s 2022 performance is something they want to take credit for.
If Plotkin is still shorting memes as an important part of his portfolio [naked or otherwise clothed], it’s instructive to notice that GameStop is down more than 11% since we rang in the new year, and GameStop has fallen a whopping 42% in the same period.
If Plotkin is still taking the other side of the meme trade, then he clearly has much bigger problems.