Description

AMC has around $4.2B in net debt.  The 10%/12 PIK 2nd lien piece of paper trades around 65 cents.   Netting cash to the banks and 1st lien, you have around $2.7B net debt ahead and then around $300mm behind you. You are the middle 1.15B piece.   

AMC will do 300-400mm of EBITDA this year.  Peaked around $800mm prior to Covid.   At 7x EBITDA, it’s worth between $2.5B and $5.6B.  Let’s give a bit more bounce back to today's 300-400mm and call it $3.5B EV.   The 2nd lien debt is worth around 60-70 cents. 

But Adam Aron has spent a year being ready to issue equity at will.   And the APEs still believe.  I would contend they will believe for sometime and it’s only semi-irrational.  If you do believe theatres bounce all the way back to 800mm, you can get to around an $8 stock.  In addition, if Aron can raise money at irrational rates above $8 that will help.   I think it’s highly unlikely we get back to 2019.  I’ll point out that as long as people have some hope of a return to 2019 which the APEs do, this will keep some equity value.  It will also have substantial debt which will likely keep a $500mm market cap.  Aron will almost certainly have room to work even if todays near $2B MC does not hold.  Look at BBBYQ as an example.  $150mm market cap and it's 100% over.   They told the world it was over and they still raised $700mm while heading to BK.  

My proposal is simple.   Short whatever AMC you feel comfortable given its meme status.  Borrow costs are again minimal and I’ll point out that Aron has committed to aggressively dilute so I feel like that radically changes the risk profile.  Today is also the end of the waiting period so tomorrow is likely when Aron can begin to dilute b/c the conversion is done. 

Buy bonds that represent some piece 25-75% larger than your short position.   Watch Aron aggressively raise equity and do debt for equity swaps that will allow him to recap on the backs of the APEs.   Meanwhile you collect 10% yield and closer 15% current.  The YTM is in the mid 20's on the bonds.  Obviously you can also buy puts or buy some out of the money calls depending on your meme-aversion.   

If he raises/swaps, $500-$1B depending on debt discount, you are whole on the bonds.  If he can get to $1.5-2B you could be looking at par value. 

Your main risk is he does not raise capital quickly enough which allows AMC stock to still spike and the bonds will be slow to catch.  He’s smart and while has been a bit of a promoter, he knows math and knows this is the moment where he can save the company.  He’s also spent a year fighting in court to get this done.  It seems easy to believe he won’t take the leak it out approach.  Maybe he does with the equity but seems likely they want the debt market to help them recap since it allows institutions to short and effectively raise capital for them.  

I don’t think the writers/actor strike too big a deal.  Even if it stretches a year, it’s mainly a risk to equity as it will solve itself.   

Simply put, I believe buying the debt at 65 cents, you make around 50% if he really goes to town and raises $1.5B plus.  And if he is only able to raise $500mm or so you are prob fairly valued.   The ugly case seems like you lose 25-50% but to the extent you are short you prob break even. 

Catalyst

Tomorrow starts the open period for Aron to begin debt/equity swaps and his already announced ATM offerings.