Description

Thesis

AMC June $1 strike puts are an attractive, loss-limited, way to bet on the normalization of equity trading dynamics in AMC’s capital structure following the collapse of the company’s dual share class structure.  The opportunity exists because:

I believe there are reasonable scenarios for the puts to be worth 4x their current trading price. At a recent price of 15c, risk 15c to make up to 70c by June 16^th, with favorable expected value and skew.

Situation background

On August 4, 2022, AMC announced a dividend of one APE preferred unit for each AMC share on August 19, 2022. APE was created as an end-run-around AMC reaching the upper limit of its share authorization as AMC shareholders repeatedly voted against increasing the AMC authorization. APE shares hold substantially the same voting and economic rights as AMC shares.

Predictably, as the company began issuing APE shares via its ATM program in order to shore up liquidity and deleverage its balance sheet, the price of APE shares collapsed.

On December 22, 2022, AMC announced a structured transaction with Antara Capital to further deleverage AMC’s balance sheet and provide AMC with a path to collapsing its dual share class structure while retaining the ability to issue additional equity.

The shareholder vote to convert APE into AMC is scheduled for March 14^th. 

Capital structure

Since the beginning of 2020, AMC has burned more than $2.5 billion in free cash flow. Notwithstanding the current distorted market cap suggesting an equity value in excess of $5 billion, AMC’s secured bonds trade at distressed levels, with a net creation value though the first lien bonds of $1 billion at current trading levels. And a net creation value through the second lien bonds of approximately $3 billion at current trading levels.

As the first lien bonds are reasonably liquid and the least likely traded instrument to be affected by meme stock dynamics in the company’s capital structure, I believe their trading level reflects a more accurate representation of the market’s view on value of the AMC enterprise than that implied by either APE or AMC market caps.

Management intentions post-vote

I believe it is highly likely that AMC will continue to issue equity via ATM offerings and debt exchanges following the company’s dual share structure collapse given that the company continues to burn cash and has repeatedly stated its priority objective of addressing its second lien bonds. One of the critical items on the voting agenda for March 14^th is a 10-for-1 reverse split. Combined with a modest increase in share authorization from 524 million common shares to 550 million common shares, AMC will have the authorization to issue over 400 million shares.

In fact, I believe it is likely that AMC issues additional APE shares even before the March 14 shareholder vote. On February 7, AMC amended its agreement with Antara Capital to permit the company to issue an additional $100 million worth of APE shares during the lock-up period.

Highlighted below is reporting that the company’s advisors have told bondholders that the company intends to continue to issue equity “as far as it possibly can.”

Scenario analysis

In the approximately 40 trading days since the company’s transaction with Antara Capital was announced, the combined APE+AMC trading volume has averaged 73 million shares per day. Assuming this continued trading volume, and the company sells 15% of the volume each trading day that it can, I believe that AMC will have issued more than 43 million additional shares (after accounting for 10-1 reverse split) by June options expiry.

Highlighted below are the days I believe AMC will be eligible to tap its ATM. This assumes the company’s 10-K has been filed and that it will file its first quarter 10-Q on the same day as it did in 2022.

Assuming 43 million additional share issuance following the special meeting, below is a sensitivity table that reflects intrinsic value of a $1 strike put at various market caps after accounting for the new share count.

Although I have ascribed meaningful probability to market caps $1 billion and higher in the sensitivity table above, I believe it is highly unlikely the company will have more than a $1 billion equity market capitalization following the conversion of APE to AMC. Based on APE trading history, we know that once the company began issuing additional APE shares via ATM offerings, APE share price collapsed from $6 to 60c. Additionally, we can see from the even more recent Bed Bath & Beyond death spiral financing that once BBBY began issuing equity, its share price collapsed from $5.86 to $1.50 in just 12 trading days.

March 10 hearing

In the past few days, two lawsuits have been filed in Delaware Court of Chancery, effectively seeking to enjoin the conversion of APE to AMC. A hearing has tentatively been scheduled for March 10 before Vice Chancellor Morgan Zurn. I believe it is very unlikely that the plaintiffs will succeed due to a plain reading of DGCL Section 242 and can address the lawsuits in further detail in the comments to the extent there are questions.

Catalyst

1. March 10 TRO/PI hearing
2. March 14 special meeting vote