Moody’s Investors Service has downgraded AMC Entertainment Holdings, Inc.’s Corporate Family Rating to Caa3 from Caa1 and the Probability of Default Rating to Caa3-PD from Caa1-PD. Concurrently, Moody’s downgraded AMC’s senior secured debt to Caa2 from B3 (consisting of a $225 million revolving credit facility, $1.99 billion outstanding senior secured term loan and $500 million first-lien notes) and $2.3 billion of senior subordinated notes to Ca from Caa2. The Ca ratings on the senior subordinated notes reflect the likelihood of a distressed debt exchange and low anticipated recovery prospects based on the proposed exchange offer from AMC. The Speculative Grade Liquidity Rating was downgraded to SGL-4 from SGL-3. The outlook remains negative.
The two-notch downgrade action reflects the high likelihood that AMC will pursue a distressed debt exchange following the recent commencement of private exchange offers to convert its $2.3 billion senior subordinated notes to a new tranche of debt at a diminished value relative to the original obligations as disclosed in AMC’s Form 8k filing dated June 3, 2020 .
The new six-year notes will be secured by a second-lien to substantially all of the company’s tangible and intangible assets. The second-lien notes will have a 12% coupon that will accrue in the form of PIK interest in the first year and paid in cash thereafter until the 2026 maturity. The Exchange Offers and Consent Solicitations will expire on June 30, 2020 with an early deadline date of 16 June 2020. The offer price varies by tranche with an approximate average price of 52% of par value, if noteholders tender prior to the early deadline, or 50% of par value, if they tender after the early deadline. The size of the new second-lien notes is currently undetermined as it will depend on the participation level of existing senior subordinated noteholders. Specifically, AMC seeks to raise up to $640 million of new second-lien notes if less than 50% of noteholders in each tranche consent to the exchange offer. However, if the more than 50% of noteholders per tranche participate, AMC plans to raise up to $1.2 billion of new second-lien notes and eliminate the covenants in the remaining untendered and outstanding senior subordinated notes.
Moody’s views the proposed distressed debt exchange as an event of default once the transaction closes. Upon closing, Moody’s will append the “LD” designation to the PDR, which will be removed after three business days. The designation results from Moody’s practice of interpreting circumstances in which a debt holder accepts a compromise offering of a diminished financial obligation as an indication of an untenable debt capital structure. The “/LD” component would signal that a “limited default” has occurred on the exchanged securities. The debt exchange is specifically designed to reduce the debt and interest expense burden and force creditors to recognize losses, which represents the occurrence of a deemed default. On or shortly after closing, Moody’s will reassess the ratings of the revised debt capital structure given that the new second-lien debt class will alter the relative proportions of structural/contractual subordination and likely result in changes to loss given default assessments for certain instruments.
The Caa3 rating incorporates governance risks, specifically the likelihood that leverage will remain above 9x over the next two years given the company’s profitability and liquidity challenges resulting from the novel coronavirus, economic recession, secular pressures facing the cinema industry, likely near-term distressed debt exchange as well as a potential future balance sheet restructuring or bankruptcy filing.
The rating also reflects the economic impact from the forced closure of AMC’s global theatre circuit in mid-March arising from the COVID-19 outbreak and ensuing economic recession on the company’s profitability, debt protection measures and liquidity. Moody’s expects AMC to gradually reopen its US theatres in July to coincide with the scheduled release of two blockbuster films, Tenet (July 17, 2020) and Mulan (July 24, 2020). However, Moody’s expects moviegoer demand will remain challenged as some consumers avoid public gatherings and the potential for infection given continuing circulation of the virus in the population. Notably, Moody’s expects OTT video streaming services will reap benefits as film studios increasingly release movies to online platforms concurrently with their theatrical release or very soon thereafter as entertainment shifts back home during the coronavirus outbreak. With the global economy in recession this year combined with the prospect of extended business closures, layoffs and high rates of unemployment, an erosion of consumer confidence will lead to a reduction in discretionary consumption. Given these economic realities, even if AMC’s theatres reopen in July, Moody’s expects moviegoer demand will be weak, which will also be affected by likely reduced seating capacity and social distancing guidelines. The supply of movies has also been impacted since the major film studios have postponed numerous releases that were scheduled to open through the end of July. As such, the expected timing for reopening AMC’s theatres will negatively impact ticket sales, especially because cinema operators generate the majority of their annual revenue during the important May to early September box office season.
AMC benefits from its national scale and diversity as the world’s largest movie exhibitor with operations in 44 US states and 14 countries overseas (13 European and one Middle Eastern) and leading market shares in most of its markets. Positive considerations include AMC’s variable cost structure that facilitated meaningful cost reductions in the short-run, as well as its business line diversity with admissions representing around 60% of total revenue and higher margin concessions accounting for 31%.
The negative outlook reflects the possibility the debt exchange could be unsuccessful resulting in a capital structure that remains untenable. The negative outlook also considers Moody’s expectation for lower revenue and EBITDA this year coupled with weakened liquidity as a result of the temporary closure of AMC’s theatre circuit. It also incorporates the numerous uncertainties related to the social considerations and economic impact from COVID-19 on AMC’s cash flows and liquidity, especially if the virus continues to spread in certain regions or resurfaces later this year, forcing AMC to keep some of its theatres closed for a protracted period or experience a second suspension of its operations. The negative outlook embeds Moody’s view that AMC will face negative operating cash flows through Q4 2020 despite the phased reopenings planned in July. The $500 million first-lien notes issued in April provided the company with sufficient liquidity to cover its cash burn through Q3 2020. However, Moody’s is concerned that the company’s liquidity will be exhausted in Q4 2020 and AMC will require additional external financing if it is unable to successfully execute the debt exchange, which should facilitate a meaningful interest expense savings and improve operating cash flow generation over the next twelve months. The company’s statement in its recent Form 8k filing  casting substantial doubt as to whether it can continue as a going concern as a result of lower-than-expected revenue or a recurrence of COVID-19 is also embedded in the negative outlook.
AMC has obtained covenant waivers from its banks through the quarter ending March 31, 2021 given that the headroom under its US credit facility’s springing covenant and UK facility’s maintenance covenant will tighten materially over the coming quarters. Cash balances totalled $718.3 million as of April 30, 2020.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The movie theatre sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in AMC’s credit profile, including its exposure to the US and European economies have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and AMC remains vulnerable to the outbreak’s continuing spread. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Its action reflects the impact on AMC of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
The Caa2 ratings on AMC’s senior secured bank credit facilities and new $500 million first-lien notes reflect their diminished expected recovery prospects due to the numerous uncertainties and challenges facing the company as well as their first-out payment position versus the senior subordinated noteholders. The new first-lien notes will share a first-priority lien on substantially all tangible and intangible assets of the company with the senior secured bank credit facility lenders. The Ca ratings on the senior subordinated notes reflect the likelihood of a distressed debt exchange as well as their subordinated position to a sizeable amount of first-lien debt and low anticipated recovery prospects based on the proposed exchange offer from AMC.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating outlook could be revised to stable if AMC reopens the majority of its theatres in July as currently planned, attendance revives to profitable levels and AMC returns to positive operating cash flow. A successful closing of the proposed debt exchange in which $1.2 billion of new second-lien notes are exchanged for nearly all of the existing senior subordinated notes could also result in a stable outlook.
A ratings upgrade is unlikely over the near-term given the expectation for weak operating performance and challenged debt protection measures. Over time, an upgrade could occur if the company experiences positive growth in box office attendance, stable-to-improving market share, higher EBITDA and margins, enhanced liquidity, and exhibits prudent financial policies that translate into an improved credit profile. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA is sustained below 7x (Moody’s adjusted) and free cash flow as a percentage of total debt improves to the 0%-1% range (Moody’s adjusted).
The ratings could be downgraded if Moody’s expects: (i) AMC will be unable to successfully complete the proposed debt exchange; (ii) AMC will pursue a second distressed debt exchange for the senior secured debt instruments; or (iii) a high likelihood of a balance sheet restructuring or bankruptcy filing.
SUMMARY OF ITS RATING ACTIONS
Issuer: AMC Entertainment Holdings, Inc.
Corporate Family Rating, Downgraded to Caa3 from Caa1
Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD
$225 Million Revolving Credit Facility due 2024, Downgraded to Caa2 (LGD2) from B3 (LGD2)
$1,980 Million Outstanding Senior Secured Term Loan B1 due 2026, Downgraded to Caa2 (LGD2) from B3 (LGD2)
$500 Million Senior Secured First-Lien Notes due 2025, Downgraded to Caa2 (LGD2) from B3 (LGD2)
GBP500 Million (US$ 617.3 Million) 6.375% Senior Subordinated Notes due 2024, Downgraded to Ca (LGD5) from Caa2 (LGD5)
$600 Million 5.750% Senior Subordinated Notes due 2025, Downgraded to Ca (LGD5) from Caa2 (LGD5)
$595 Million 5.875% Senior Subordinated Notes due 2026, Downgraded to Ca (LGD5) from Caa2 (LGD5)
$475 Million 6.125% Senior Subordinated Notes due 2027, Downgraded to Ca (LGD5) from Caa2 (LGD5)
Speculative Grade Liquidity Actions:
Issuer: AMC Entertainment Holdings, Inc.
Speculative Grade Liquidity, Downgraded to SGL-4 from SGL-3
Issuer: AMC Entertainment Holdings, Inc.
Outlook, Remains Negative
Headquartered in Leawood, Kansas, AMC Entertainment Holdings, Inc. is the largest movie exhibitor in the US and globally, operating 996 movie theatres with 10,973 screens in 15 countries across the US, Europe and the Middle East. The company is 50% owned by Dalian Wanda Group Co. Ltd. Revenue totaled approximately $5.2 billion for the twelve months ended March 31, 2020.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016.