AMC Entertainment Holdings (AMC 6.24%) has been struggling to contain the harmful effects of the pandemic. Months-long closures of its theaters brought revenue close to zero and forced management into emergency measures to keep the company afloat.
Movie fans are coming back, but nowhere near the rate AMC needs in order to break even. With billions in debt coming due, refinancing seems like the only option. That said, interest rates are rising fast. If the trend continues, it could be devastating for AMC.
AMC has a hefty debt burden
Indeed, AMC has two separate loans coming due in 2026. One is for $1.5 billion and the other for $1.94 billion. The latter carries 3.35% interest, and that rate is likely to rise significantly when AMC goes to refinance. The former costs AMC 10% if it pays cash or 12% if it pays in any other method. It's unlikely that when 2026 comes around, AMC will have enough cash to pay the principal on those loans.
As of March 31, AMC held $1.16 billion in cash on the balance sheet, which was down from $1.59 billion at the same time last year. Its balance sheet was infused with more than $1 billion in cash from the meme stock frenzy that allowed management to sell stock at sky-high prices.
That lifeline is maxed out, and when management tried to get shareholders to authorize more stock sales, their disapproval of the idea forced management to pull back on the plan.
Fortunately, AMC's business rebounded as blockbusters brought viewers back to the cinema. In its most recent quarter, revenue increased fivefold from the same time the year before. Unfortunately, AMC lost $295 million in cash from operations even with the boost. It is going in the opposite direction rather than earning money to prepare to pay down the debt.
That leaves one other option: to refinance the debt. AMC did something similar recently. It issued roughly $950 million in new bonds in February at 7.5% interest. It used the funds to pay off the older debt due in 2025 and 2026, costing AMC 10.5%. That move will save the company on interest expenses.
However, interest rates are rising, and there is no telling if AMC can secure similar terms if it decides to follow the same plan to pay for the $3.4 billion in debt that it still has coming due in 2026. With the company already struggling to break even, the incremental increase in interest expenses could be crushing.
What this could mean for AMC investors
AMC has paid $387 million in interest expenses in the last 12 months. In the previous decade, the company's highest operating income was $310 million in 2018. So even if it can return to performance levels from before the outbreak, it will probably not be enough to pay its interest expense at the rate of the previous 12 months.