AMC is Both the Best and the Worst of Public Markets
Culture 2024-12-13

Private markets have exploded in the last several years due in part to their calmer nature compared to the volatile values of publicly traded stocks and bonds. However, movie theater chain AMC Entertainment demonstrates that public market manias aren't always bad — at least not for those who are willing to take a chance.


AMC's stock shot up 135% this week, reaching a high of $6.85, seemingly for no other reason than a mysterious social media post featuring a gamer that drove up the value of certain stocks known as "meme stocks." Similar to a competitor in Mario Kart who receives a power-up, AMC quickly took advantage of the rally and used it to pay down debt, exchanging its extremely bubbly stock for debt with a face value of $164 million.


For everyone, it might seem like a wise decision. Bonds issued by AMC that are due in 2026 were trading for 70 cents on the dollar, or $122 million when interest is taken into account. Those who accepted the theater chain's offer received 23.3 million shares, so theoretically speaking, they are now in a better position than they were so long as the price of their shares stays above $5.24.


Here are two problems. One is that illogical stock booms can quickly unwind; in fact, this one has already partially done so. The stock immediately fell to as low as $4.73. Since then, they have recovered, but only to the point where bondholders are now profitable. Even though AMC has secured the deal, it might need to offer more next time.


The other catch is that, in the eyes of AMC CEO Adam Aron, this is just a small stone in a big corporate debt pile. Including annualized operating leases, the troubled company owes about $8 billion in net debt. All that's keeping stocks above their Friday close of $2.91 is mania. Someone is going to get burned; chances are high.


Of course, the majority of troubled companies would jump at the possibility of paying down some debt, even if it was just because of an unexpectedly sharp decline in their cost of capital. AMC has made sensible use of its power-up. However, nothing regarding AMC has changed, so everything is still essentially random.