In my recent appraisal of the health of AMC Entertainment's (AMC 1.78%) dividend and stock, things seemed all well and good... for now. The movie theater operator's adjusted free cash flow of almost $300 million handily covers its $82.5 million annual dividend payments, and at just five times adjusted cash flow, the stock currently appears quite cheap.
The big concern, however, is the company's extremely high debt load, which is largely the result of three acquisitions from 2016 to 2017, as well as large investments in luxury-recliner seating. At the end of 2018, the company's debt obligations surged to over $5.2 billion, including capital lease obligations.
Fortunately, AMC just took a big step toward mitigating that risk, with a huge debt refinancing on fairly advantageous terms.
Five worry-free years
AMC just completed a $2 billion refinancing of its closest maturities, which were due in 2022 and 2023. While those are still a ways off, the looming maturities were likely an overhang for the stock, as it was unlikely the company would be able to pay off that debt with internal cash flow. The new notes are due in 2026, a full seven years from now.
The new $2 billion notes will carry an interest rate equal to the LIBOR rate plus 3 percentage points. The current LIBOR rate is about 2.61%, so the new term loan will bear an interest rate of 5.61%, with yield to maturity being slightly higher because the notes' initial price will include a slight discount.
With the proceeds, AMC will retire:
- Roughly $1.35 billion of its Senior Term loans due 2022 and 2023, priced at LIBOR plus 2.75 percentage points.
- $375 million of 5.875% Senior Subordinated Notes due 2022.
- $230 million of 6% Senior Secured Notes due 2023.
- The company also extended the maturity date of the $225 million revolving credit facility until 2024.
The refinancing does a couple of great things for AMC. First, it pushes out its maturities so that AMC will have no debt due until 2024, a full five years from now, with only a $634 million amortizing loan due then. That should give the company plenty of time to complete its recliner-seating renovation program and reap the full benefits of the increased returns on those investments without having to worry about putting off those investments in order to raise cash.
The refinancing could also mean AMC will hang on to its European theater assets instead of having to sell part of them. AMC had previously contemplated a partial IPO of its European theater assets in order to pay down debt but shelved those plans in 2018, as the European box office didn't perform as strongly as the U.S. last year. With this extension, AMC may be able to hang onto these assets instead of being a forced seller.
Check out the latest earnings call transcript for AMC Entertainment.
A good time for floating rate?
While the overall interest rate on the new notes is roughly equal to the average rates of the redeemed notes, it does replace about $600 million fixed-rate notes with floating-rate notes. Thus, the company seems to be making a bet that between now and 2027, interest rates won't go up much from here. In fact, with the Federal Reserve now not anticipating any further rate increases until 2020, some anticipate interest rates could actually go lower from here, not higher. Even former Fed Chair Janet Yellen said as much in a recent interview.
If interest rates have in fact peaked, the current refinancing could be a very savvy move, indeed. In 2018, AMC paid over $300 million in interest expense and capital lease payments, which is almost one-third of the company's adjusted EBITDA. With interest costs being so high, any small amount of rate relief could be significant for AMC.
Of course, AMC's management is taking a gamble here. If interest rates end up increasing for whatever reason, AMC's interest costs would surge in tandem.
Mostly good news until 2026
The refinancing won't close until the end of April, but as the company's press release said, the offering was oversubscribed. AMC should have no trouble closing on the deal.
There are two potential downsides here. First, interest rates could spike unexpectedly, causing higher debt maintenance expenses for AMC. Also, the company will now have $2.6 billion in debt maturing in 2026, which is a huge amount to come due in a single year. So AMC will likely have to refinance those notes at some point.
Still, with seven years until then and a full five years until its next big maturity, AMC has plenty of time to weigh its options, all while increasing its cash flow in the meantime.