AMC Entertainment Holdings Bonds A Great Deal

AMC Entertainment Holdings is the largest owner of movie theaters in the world with over 900 theaters and 10,000 screens. It is a high-margin business that doesn't require lots of capital. However, the company is highly levered with over $5.1 billion in debt against $2.5 billion tangible assets.

AMC has $4.6 billion in building leases. A building lease is an asset when it is in a great location and a good rate for a very profitable business. It is a liability any other time. Especially if a pandemic forces all locations to close simultaneously. AMC has been able to negotiate forbearance on most of its leases and is now reopening theaters.

With almost $500 million cash on hand and no debt coming due until 2022, AMC doesn't have a near-term liquidity problem.

For investors, AMC is one of those rare situations where a senior security is troubled while a junior security is rising - its bonds are troubled while its stock is rising. For example, AMC's 6.125% Senior Subordinated Notes due 5/15/2027 are selling for 32 while the stock has risen to $7. If we believed that a bankruptcy is likely we could buy the bonds, short the stock, and collect the 6.125% coupon until the bankruptcy develops. If we believed that a bankruptcy is not likely, which is my guess, we could buy the bonds, collect the coupon, and stand ready to short the stock if trouble develops.

As an example, let's invest $3,200 to purchase $10,000 of the bonds and enter four GTC orders to short the stock - 100 shares at $6, 150@5, 200@4, and 350@3. There are three basic scenarios:

1. AMC prospers. The stock continues to rise, or at least doesn't below to $6. We collect $612 in interest payments each year - a yield of 19%. On May 15, 2027 we get $10,000 - a 3x increase on our invested capital. Most likely the bonds rise well before 2027 and we would have the option of selling the bonds for a handsome gain if so desired.
2. AMC goes bankrupt. The stock falls, we short the stock on the way down which produces $3,200 in cash, and we keep whatever interest payments received before the bankruptcy. If the bankruptcy where to occur in January 2021 then only one semi-annual interest payment would have been made of $306. That is a return of almost 10% in just four months. Still a nice return on the investment.
3. AMC flounders about always on the verge of bankruptcy but never quite getting there. After, say, a year the stock falls to $2 and the bonds to 20. If we exit at that point we will have a loss of $1,200 on the bonds, a gain of $1,600 on the shorted stock, and have collected $612 of interest payments. A net gain of $1,012. A 32% return in one year.

This is an arbitrage between the bond market and the stock market and is offering a great return for those willing to make the trade and put in the work to shepherd it over time. There are several other similar trades available in the market right now. I particularly like this one because the stock is providing a good amount of coverage and is easily shortable.