Now that all its theaters are reopened and it is no longer in crisis mode, the management for AMC Entertainment Group (NYSE: AMC) is making moves to reduce the debt burden.
To quickly recap, AMC suffered tremendously from extended temporary closures of its theaters during the pandemic. The company's primary source of revenue relies on bringing large groups of people together in person to watch films. Unfortunately for AMC, that was considered just the sort of environment conducive to spreading COVID-19. The temporary shutdowns wreaked havoc on AMC's finances.
To remain in operation, AMC management made a series of decisions that helped raise billions of dollars from a combination of high-interest loans and the issuance of millions of additional shares to keep the company solvent until operations could resume. The roughly $5.7 billion in debt it now has is weighing heavily on this entertainment stock.
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AMC to refinance nearly $900 million in debt
Last week, AMC announced it is looking to borrow $950 million in debt financing. The company will pay interest of 7.5% on these funds, with the principal due in 2029. Initially, management planned to raise $500 million under these terms, but the response from lenders willing to come to terms must have been significant enough for them to increase the sum.
This new borrowing will be used to refinance existing high-interest debt. AMC intends to use $500 million to pay back first-lien secure notes that are due in 2025 and carry an interest rate of 10.5%. Another $300 million will pay off two series of secure notes due in 2026 bearing a 10.5% interest rate. Finally, it will use $73.5 million to pay back secure notes due in 2026 that have an interest rate of 15% if paid in cash. Collectively, the notes AMC is refinancing were hitting the company for $95 million in pre-tax interest expense annually.
The new debt of $950 million at 7.5% will cost AMC $71.25 million in pre-tax interest expense. Effectively, AMC's pre-tax interest expenses will drop by nearly $24 million, which is not an insignificant sum. The move also buys AMC more time to resolve its revenue issues. Almost $900 million of principal payments due between 2025 and 2026 will be extinguished, and the new debt will be due in 2029.
Given that AMC is still struggling to recover, these moves should be a significant benefit. Despite economic reopening, the company is on pace to lose several hundred million dollars on the bottom line in 2021. Fortunately for shareholders, AMC recently reported it reversed cash losses from operations and earned $216 million in cash from operations in Q4.
AMC management still has work to do
It is yet another move in the right direction for the struggling theater chain. Management might be hoping this is the first of many debt refinancings that will lower its interest expense, which totaled $328 million in the nine months ended Sept. 30. Revenue is still far below pre-pandemic levels, and one way the company can stop the bleeding on the bottom line is by reducing expenses.
Even after this refinancing, AMC still has over $2 billion in debt on its balance sheet that has interest rates exceeding 10.5%. If AMC can keep improving its operating performance and using the cash to shore up its balance sheet, it may be able to get even better terms to refinance the rest of its debt.
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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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