AMC Entertainment announced today that it bought back a total of $72.5 million of its long-term debt in the open market at a 31% discount in a move that seeks to take advantage of an overall decline in the value of corporate bonds amid changes in macroeconomic conditions.
According to the official press release, the transaction involved the repurchase of AMC’s 10% Second Lien Subordinated Secured Notes due in 2026 for a total of $50 million. The operation will result in $7.25 million in savings for AMC in annual interest expenditures.
“Thanks to our passionate and supportive shareholders who helped us build a war chest of cash, and in light of the continued recovery of theatrical exhibition, we are very pleased to announce that the Company was able to repurchase more than $72 million of second lien debt at a significant and beneficial discount”, stated AMC’s Chief Executive Officer, Adam Aron, in regards to the transaction.
AMC Entertainment (AMC) stock is relatively unchanged this morning in the first few minutes of the trading session despite the announcement, possibly as the transaction is quite small in relation to the company’s total corporate borrowings, which stood at $1.67 billion by the end of the first quarter of 2022 according to its latest quarterly earnings filing.
This announcement comes only days after the company announced that it had its busiest weekend of the year amid the release of the movie Thor: Love and Thunder. According to AMC, admissions revenues in the US during this two-day period surpassed those of the same period in 2019 – before the pandemic – by an estimated 14%.
“We are just thrilled beyond thrilled that this weekend approximately more than 5.9 million people were guests at AMC movie theatres in the United States and internationally, making it our highest attended and highest grossing weekend of 2022 so far”, stated the CEO of the movie theater chain in regards to this development.
Corporate Debt Yields Soar Amid a Shift in Macroeconomic Conditions
Corporate debt yields have been rising this year amid the Federal Reserve’s decision to hike its benchmark interest rates and due to the higher odds of a recession.
Since yields move inversely to bond prices, companies in a good financial position could make the decision to buy back a portion of their debt at a discount. According to data compiled by Koyfin, the effective yield of 1-3 year corporate bonds as per the ICE BofA 1-3Y US Corporate Bond Index has nearly quadrupled from 1.21% to 4.1% year-to-date.
Meanwhile, the yield of corporate bonds with low ratings – also known as junk bonds – has nearly doubled from 4.35% to 8.32% since the year started.
Moody’s Recently Upgraded AMC Entertainment’s Debt
In February this year, Moody’s upgraded AMC’s first-lien notes and other instruments to Caa2 and changed its outlook from negative to positive.
Analysts from the credit rating firm justified their outlook change as follows: “The ratings upgrade reflects Moody’s expectation for continuing improvement in AMC’s operating performance and liquidity amid growing attendance levels at the global box office combined with our expectation for a strong movie slate in 2022”.
That said, the report also warned: “While the rating reflects Moody’s expectation for improvement in AMC’s operating performance, it still embeds Moody’s view for a balance sheet restructuring given AMC’s untenable debt capital structure, the uncertainty surrounding Disney’s adherence to the theatrical window and rising inflation concerns that could dampen moviegoer demand”.
According to Moody’s scale, a Caa2 rating “are judged to be speculative of poor standing and are subject to very high credit risk”.
AMC Entertainment is expected to report its quarterly earnings covering the second quarter of the 2022 fiscal year on 4 August.
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