AMC may benefit from chapter, analysts say

For the world’s largest cinema chain, bankruptcy could be the best option to survive the coronavirus pandemic.

The coronavirus pandemic has hit cinemas since March, cracking their bottom line, but no one has been hit harder than AMC. The cinema chain got caught up in the pandemic with nearly $ 5 billion in debt, which it amassed to add luxury seating to its theaters and buy in rivals such as Carmike and Odeon.

Since January, the company’s shares have fallen more than 60%, and in the past five days the stock has fallen around 30%.

Last Friday, AMC said Mudrick Capital Management had agreed to invest $ 100 million to help the financially ailing cinema chain survive the ongoing coronavirus pandemic. However, the movie theater chain will still need at least $ 750 million in additional liquidity to fund its cash needs through 2021.

“In all honesty, I believe Chapter 11 is really the only way AMC can survive,” said Doug Stone, president of Box Office Analyst. “I don’t see any appetite out there for more $ 750 million in stock sales and any debt they take on will be astronomical.”

AMC has focused on fundraising for months. The cinema chain has already renegotiated its debt to improve its balance sheet this year and is exploring various ways to raise additional sources of liquidity. It is also trying to find ways to increase the number of visitors.

“The simple answer is, if you file for bankruptcy, it is more likely a reorganization than a liquidation,” said Michael Pachter, an analyst at Wedbush. “In bankruptcy, they can wipe out their lease obligations and extend the leases that make sense, potentially reducing their total cost of ownership.”

As coronavirus cases continued to rise in the fall and winter months, studios have postponed major blockbusters until mid-2021, and some have chosen to simultaneously release major films in theaters and on streaming platforms in order to limit potential ticket sales .

The hope is that with a vaccine, Covid-19 cases will drop significantly and audiences will be more willing to return to theaters. This in turn gives the studios the confidence to keep important film titles on the calendar. Without fresh content, moviegoers will not return in sufficient numbers to give cinemas any real financial boost.

Still, a vaccine may not be generally available to the public until mid-2021. While the news is promising, it does not address the short-term problems cinemas face.

“I think that now that vaccines are introduced, creditors and landlords will be ready to work with them,” Pachter said. “It has been difficult to give them more credit when there was no ‘light’ at the end of the tunnel, but it is likely that we will get back to something that is nearing normal by the middle of the year, so restructuring makes a lot of sense . “

AMC did not immediately respond to CNBC’s request for comment. The company reiterated on SEC filings that bankruptcy is an option for the company if it is unable to raise additional funds.

In times without a pandemic, the theater industry is profitable. In 2019, the domestic box office had its second-best year ever at $ 11.4 billion, just below the record of $ 11.9 billion in 2018. Before the global outbreak, 2020 was facing a similar level.

Now movie chains are desperately renegotiating with lenders and landlords, trying to find creative ways to generate revenue. Most major movie theaters are now offering cheaper private theater rentals to attract reluctant moviegoers. Others have turned parking lots into concert halls, launched quiz nights, and even negotiated contracts with local colleges to rent out the space for personal learning.

Cinema chains are facing tough headwinds in the first part of 2021 as there are limited new films and cases are expected to remain high.

“January is turning out to be a very challenging month with little product impact,” said Stone. “The introduction of vaccines is unlikely to have a big impact until late in the second quarter, in my opinion. I don’t think AMC can do without restructuring until then.”

But there is hope for AMC and other domestic cinema chains, said Eric Wold, senior analyst at B. Riley Securities.

“We have already seen a very strong response to films in countries that opened earlier than the US, especially China, which we believe provides a strong early glimpse of what to expect here in the US . ” Said Wold.

“And given what AMC and many other exhibitors learned during the pandemic about more efficient operations and the flexibility of the company’s rental partners, we could actually see AMC operationally emerge in a stronger position than before the pandemic that would have a way to go offer renewed deleveraging, “he said.

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