What happened
Shares of movie theater operator AMC Entertainment Holdings (AMC) were higher by 6% at around 11 a.m. EDT. After that swift rise, however, the stock began to cool off some, only holding on to a 1.5% gain by 2 p.m. EDT. There was a notable update from the company, but it really doesn't change the big picture story here, so it makes sense that the stock didn't hold on to its early advance.
So what
AMC issued a convertible bond two years ago. When sold, the conversion rate was set at 52.7704 shares of Class A common stock per $1,000 principal amount of the convertible bond. However, there was a reset provision that triggered on Sept. 14, the two-year anniversary, because the stock has traded materially below a contractual price level. As such, the conversion rate is now set at 74.0381 shares per $1,000 principal amount.
Based on this change, and assuming conversion of the 2026 notes, Silver Lake, a global technology investment firm, would end up receiving stock worth 30% of AMC outstanding shares and 18.5% of voting power at the company. (Silver Lake owns additional shares in AMC outside of this convertible security, as well.) In addition to the change in the conversion rate, Dalian Wanda Group has forfeited some of its AMC shares to AMC and they will be canceled if the convertible notes are, in fact, converted at their maturity in 2026.
Image source: Getty Images.
There are a lot of moving parts here but investors shouldn't get too caught up in the details. Effectively, because AMC's stock has been languishing at such a low level, a reset was tripped in a convertible bond that will likely end up giving Silver Lake more say at AMC. Whether or not that's good news isn't really clear today and probably won't be for some time (and the answer will probably depend on who you ask). But what is very obvious today is that AMC is struggling because of the COVID-19 shut downs and the lingering fear among moviegoers about visiting the local theater again. This is what led to the reset of the conversion rate. But whatever comes from that change will likely have very little impact on the big issue facing AMC today, which is that it needs to get customers back into its movie seats or the business doesn't have much of a future.
Now what
Although issues like the conversion rate change can have a big impact on an investment's desirability, AMC is currently facing an incredibly difficult operating environment. That is probably the more important issue for long-term investors to focus on today. Indeed, if AMC ends up succumbing to the current headwinds, what happens with this particular convertible bond won't really matter anymore.
