The Bigger They Are, The Harder They Fall

As the coronavirus brings public life around the world to a standstill, several movie theaters are on the verge of default and possible bankruptcy.

AMC, the world’s largest theater chain, has hired attorneys to help restructure its mountain of debt as its credit rating plummets.

According to the president of NATO (National Association of Theatre Owners), exhibitors both large and small face a substantial risk of bankruptcy.

AMC theaters will most likely remain closed through June due to the impact of the global pandemic.

The man once credited for transforming the US ski industry, AMC’s CEO since 2015 Adam Aron, has presided over expensive buyouts and deals with China that have created a debt-ridden nightmare.

From Bad To Worse

Theater owners have long been on the ropes from years of fleeing moviegoers opting for a growing list of streaming options and rising ticket prices. At the same time, the studios and exhibitors peddle fewer, but far-costlier, franchises, remakes, and reboots.

Since mid-March, most movie theaters have suspended all screenings worldwide for at least the next six to twelve weeks resulting in theater chains of all sizes have lost considerable value since the beginning of the year compared to the general market. Stock prices of several exhibitors, which have looming payments to creditors and landlords, are on the verge of insolvency.

It remains unclear if the theater owners qualify as a distressed industry, which could make it eligible for federal loans introduced in the $2 trillion rescue package.

The question for distributors, shareholders, and all partners alike is how long the cash will last for theater owners with no revenue. AMC is the most likely exhibitor to default, while Cinemark and IMAX should weather the storm relatively unscathed.

Debt Bubble

After years of gorging on easily-obtained debt to grow bigger-and-bigger, the global shutdown of movie theaters for the last two weeks has obliterated shares of AMC. 

While the markets soared, the company’s shares have been in decline since 2019 before disruptions in mid-March sent prices plunging from $8 to $2 per share. This time last year, AMC traded around $15.

AMC’s $5 billion debt load is trading at alarming levels. The company’s junior bonds are trading at 36 cents on the dollar, down from 80 cents at the beginning of March.

Aron has tried several times to distance AMC from debt concerns and other issues relating to its Chinese parent company Wanda Group dating back to 2017.

Best Dressed

Canada-based IMAX is likely the best-positioned theater company with an entire year of cash flow in the bank, plus open credit lines that could keep it stable for years. 

Notably, the company has massive exposure in China with over 700 IMAX theater licensed through IMAX China Holding. If indeed China is about to reopen public life, this could result in steady revenue, while most major markets are still in lockdown.

Cinemark is also well-positioned in these severe conditions with six months of cash on hand as well as untapped credit lines. Likewise, National CineMedia has enough cash and credit to last a year.

Globally, movie theaters generate over $50 billion a year from a mix of ticket sales, concessions, and advertising. In the US, the total is near $15 billion.

Razor’s Edge

Top theater chains in the US and UK are collapsing under the weight of debt used to fuel massive consolidation over the last five years. Last week, AMC borrowed the remaining funds under its revolving credit facilities.

Orchestrated by costly financing, AMC doubled down on an industry already in decline. Complicated by Chinese ownership, the world’s largest exhibitor only has three to four months’ worth of cash available.

Among other exhibitors, AMC’s balance sheet is over-leveraged with the least room for creative fixes. Based on rental expenses, operating costs during the closure, and interest alone of $300 million a year, AMC needs roughly $2 billion to fund a year’s worth of operations. With only $600 million in available credit, AMC has enough money to keep the lights on for less than four months. Currently, AMC has around 630 locations in the US. 

RELATED: The financial health of the UK’s Cineworld has been on life support since the theater chain borrowed heavily to acquire Canada’s Cineplex in December 2019 and the US’s Regal Cinemas in 2018.

Last week, AMC implemented a furlough plan involving 600 workers at its corporate headquarters, plus an additional 2,000 employees across the company. The plan calls for reduced hours at lower pay, or no hours at no pay. At this time, AMC isn’t terminating any corporate workers. The company’s 150,000 hourly workers should qualify for unemployment compensation.

FilmTake Away

As AMC nears default, the company will likely be able to amend rental agreements with landlords since replacing a cinema with a tenant in even the best of times would be a difficult task, and renegotiate its long-term debt. Under normal circumstances, AMC would enter bankruptcy, and more capable investors and managers would acquire its assets.