Distressed Credit Digest

June 14, 2020

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Distressed/High Yield Watchlist

Tracking 240 credits from 147 companies
Click here for the full watchlist

Added (9 companies)
4finance Holdings
Algeco Scotsman Global
Bruin E&P Partners
Buena Vista Gaming
Ensign Drilling
Exela Intermediate LLC (XELA)
Global Aircraft Leasing
Golar LNG (GLNG)
Vine Oil & Gas (VOGL)

Removed  
none

Top Movers for the Week

Bottom Movers for the Week

Highlights

Hertz (HTZ) got court approval to sell potentially “worthless” equity while in bankruptcy. The unsecured notes continue to rally off that news ending higher by ~15pts to 48.50.

AMC Entertainment (AMC) sub notes moved higher by 4-5pts to around 36.

‣ In another volatile trading week for airlines, American Airlines (AAL) bonds finally pulled back after rallying the last three weeks. AAL 5.000 ’22 traded down 11.50pts to 65.00 while the AAL 3.750 ’25 traded down 11pts to 56.00.

Bombardier (BOMBF) traded lower across the capital structure. BOMBF 7.500 ’24 were lower by 8pts to 71.00 yielding 17%.

Mens Warehouse (TLRD 7.000 ’22) traded lower by 7.5pts to 21.50 as fears the company will be pushed in bankruptcy by the end of the summer. The stock was volatile this past week, rising to as high as $2.42 before closing at $1.27 ($62M market cap).

‣ Casino industry continued to reopen across the country, bringing needed strength to the casino debt in general. Mohegan Tribal Gaming (MHTG 7.875 ’24) traded higher by 8pts to 81 yielding 13.1%.

Upcoming Week

Chesapeake Energy (CHK) saw its stock surge from $23 to $70 back to $19 by the end of the week. This upcoming week, the company has to make interest payments of some of its notes. It will be a small preview on how the company will handle a massive interest payment (~$125M) due July 1st for its 11.5% 2nd lien notes ($2.2B outstanding).

CBL & Associates (CBL), a shopping center REIT, saw its bonds trade off the lows. CBL 5.250 ’23 traded up 7pts to 32.00. The CBL equity continues to trade around $60-70M market capitalization as the company issues “going concern” and an interest payment on its debt this week.

Briggs & Stratton (BGG 6.875 ’20) have a coupon payment due this week. The company continues to struggle with its upcoming maturity and sale of a business unit.

 


AMC Entertainment – The Final Showing?

This year has been a challenge for everyone. Even harder for highly levered companies like AMC Entertainment who have been directly affected by Covid-19. Since March, they have suspended all operations with hopes to reopen in July. However before the pandemic, investors were already cautious heading into 2020.

Snapshot Overview

https://www.koyfin.com/snapshot/s/AMC

AMC Entertainment Holdings, Inc., through its subsidiaries, is involved in the theatrical exhibition business. The company owns, operates, or has interests in theatres. As of March 17, 2020, it operated approximately 1,000 theatres and 11,000 screens in the United States and internationally. The company was founded in 1920 and is headquartered in Leawood, Kansas. AMC Entertainment Holdings, Inc. is a subsidiary of Dalian Wanda Group Co., Ltd.

https://koyfin.com/s/VmCMGP1xi6

Becoming the world’s largest movie theater chain

In 2012, Chinese conglomerate Dalian Wanda Group bought AMC Entertainment for $2.6B, including debt. In December of 2013, the company went public by offering Class A common stock. Fast forward to today, Wanda Group continues to owns ~49% of the total outstanding common stock (via Class B super voting shares).

AMC Entertainment did three major acquisitions to get them where they are today. All of them were closed within five months of each other between 2016 and 2017.

 Carmike Cinemas (US) — $1.1B plus assumption of debt
 
 Odeon Cinema (UK & Europe) — $1.2B
 
 Nordic Cinema (Baltics) — $929M
After these acquisitions were completed, AMC became the largest movie theater chain in the world. In the 2018, the newly combined company posted $5.46B total revenues (75% US + 25% Intl) with total EBITDA of approximately $847M.

Debt and streaming concerns

A blockbuster 2019 for Hollywood should have enabled AMC to build on 2018’s momentum. Yet, that was not the case as revenues were roughly the same while seeing a drop in EBITDA by $137M to $710M.

Analysts and investors started to fear this trend would only worsen due to the rise of media streaming platforms. As movie studios look to release more movies directly to consumers, theaters will see less proceeds. Disney, which owns numerous movie studios, released its own streaming service, Disney+. Within six months it grown to over 54 million paying subscribers. This has only further spooked investors as they feel Disney and others will eventually engage into a more direct to consumer model.

While competition from streaming is more of a long term worry, the company’s interest expense and capital expenditures are more of present day concern. As of the end March 2020, the company’s interest expense was $300M annually and spent an average of $500-550M a year on CAPEX.

https://koyfin.com/s/NzM21XVCVd

Capital Structure with EBITDA Estimate Multiples

In March, AMC suspended all operations. The company quickly responded to this unfortunate disruption to business by issuing $500M of 10.5% secured debt financing which gave the company enough liquidity until the early fall.

Many analysts expect it will take at least 2-3 years (if ever) for AMC’s EBITDA to recover above $600M. The newly issued secured debt puts the company’s annual interest expense now at an estimated $352M.

https://koyfin.com/s/EByERoS2Va

Current Capital Structure 

Due to the FASB’s new lease accounting standard that began in 2019. The capital structures shown below are broken down with and without capital leases in order to better compare against historically.

Historical EV/EBITDA NTM Chart

On a historical basis, it has traded around 7.0x – 9.0x forward EV/EBITDA multiple (excl capital leases).

https://koyfin.com/s/yAbr4KMQ5v

Debt Exchange — One Final Move

On June 3, the company began commencing private offers to exchange its senior subordinated debt for a new second lien PIK/cash notes (approximately 50-53% of face value).

SEC Filing for the debt exchange

While unclear how many will participate in this exchange, if it is successful the company will have the option to pay in kind (PIK) rather than cash. Allowing to increase liquidity over a year period by $135-$140M.

For bondholders, exchanging allows them to move to a higher ranking debt class: Senior Subordinate to Second Lien. However, this exchange also moves the Silverlake convertible note into the first lien group and if everyone participated in this exchange it seems the Sub Notes would be no better off than before.

If there is 50% participation for the exchange

50% participation

 

AMC Senior Sub 5.75% 2025 Historical Price Chart

AMC 5.75% ’25 Historical Price Chart (FINRA TRACE)

 

If there is 75% participation for the exchange

75% participation

 

If there is 90% participation for the exchange

90% participation

Conclusion

AMC seems to be doing everything needed to survive. There was no hesitation to issue secured debt to get the necessary liquidity during this time of uncertainty. But, this exchange looks like the last available move for AMC Entertainment.

All things considering, it is amazing the stock is only down 3% since March 1st of this year. Stockholders have already priced in a strong recovery for AMC based on its current market capitalization of ~$614M. If the company was to get 90% exchange participation as well as $600M in EBITDA in 2021, it would still be valued at a historically high 9.0x EV/EBITDA (not taking into account capital leases). Leaving very little margin of error or financial missteps for shareholders.


I am Rich, the co-founder of Koyfin. As a former distressed high-yield trader now designer/developer, I wanted to share some thoughts and observations I see in the distressed high-yield corporate bond market. During my trading days, I shared a daily distressed digest with clients containing trading color and news. Now, I hope to share them with you. Feel free to follow me on Twitter @koyfinTrader as well as share any feedback. My DMs are always open.