Adam Aron’s AMC Junk Bonds Is a Meme-Era Rorschach Test for Junk Bonds

You know you’re at least a very specialized type of cool when people are lining up to buy your junk.

With AMC Entertainment back on what appears to be a relatively hot streak, CEO Adam Aron has attempted the first stage of his plan to refinance the cinema chain operator’s roughly $5.5 billion debt. , announcing Wednesday morning that AMC had started with a $500 loan. million junk bond issuances, which Bloomberg later reported nearly doubled to about $950 million.

The label “junk bonds” is not a value judgment. These are high-yield corporate bonds offered by a company with a CCC+ credit rating from S&P Global Ratings, and lots of debt. The new financing was expected to have a rate of return in the range of 7.5% and replace existing 10.5% coupon debt borrowed earlier during the pandemic.

Clearly, this appears to be popular junk.

The company’s intention to refinance its debt was openly discussed by Aron, who even tried in the summer of 2021 to capitalize on AMC’s stock market momentum by issuing more shares, only to have that attempt rebuffed. by retail investors who then owned the majority of AMC’s free float and did not want their shares diluted.

Faced with being rejected at prom by the people who took him, Aron didn’t hesitate to settle AMC’s debt one way or another even though he sold popcorn, continued to court its “monkeys,” reopened theaters and sold more popcorn.

“In 2022, I would like to refinance some of our debt to reduce our interest charges,” Aron tweeted on January 3. “Pull back some debt maturities by several years and relax covenants.”

Although AMC shares have fallen nearly 75% since the summer, they entered a three-day winning streak on Wednesday and revealed on Tuesday that revenues had rallied from pandemic lows to give Aron a great leeway on its balance sheet.

And while we predicted that Aron might opt ​​for a convertible bond to refinance himself out of debt, he apparently chose to go another route, using junk bonds to get a debt first. best rate on the most expensive things.

In some realities, the optics of a movie theater chain emerging from a global pandemic that has also accelerated the entertainment industry’s transition to a streaming video model, now offering junk bonds to pay off costly debt , while facing a super volatile stock price, could be considered a tough sell for even the most vulture debt investor.

On the other hand, bond terms have a solid quality and good yield that you can’t find in any junk shop.

Yet, like many of the big moves Aron has made over the past 13 months, Wednesday’s big junk bond rollover was done with the tacit recognition that AMC is not a normal company and that its powers of memes can create behavior that markets aren’t used to seeing.

Another advantage of junk bonds is that they don’t dilute stocks, AMC closed nearly 8.5% on Wednesday despite the apparent popularity of the offer, which may be more of a growing move by less zealous investors to ‘cash in shares even in 2022. market reality is taking shape.

As proof of the point, GameStop shares fell more than 11% on Wednesday, which is of less concern to that company’s chairman, Ryan Cohen, who has already used his same stock market power to massively reduce GameStop’s problematic debt position. GameStop in 2021.

Even with more hot air coming out of the stock meme balloon, Wednesday’s offer is a cunning attempt to finally do what Cohen did and strike while the iron is still hot, making it clearer that even if the AMC’s share price falls back into the single digits, it can still use what happened in 2021 to survive beyond 2022.

Melvin Capital: Limit your lack of enthusiasm

The news that hedge fund Melvin Capital lost 15% in January was greeted with joy by social media monkeys who still consider fund founder Gabriel Plotkin one of their existential enemies in the quest for MoASS, c i.e. the mother of all short compressions.

But while any bad news for Plotkin and his team 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 performance in 2022 is anything. which they want to take credit for.

If Plotkin still shorts memes as a major part of his portfolio [naked or otherwise clothed]it’s instructive to note that GameStop is down over 11% since we rang in the new year, and GameStop is down 42% over the same period.

If Plotkin is still taking the other side of the meme trade, then he clearly has much bigger issues.

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