AMC’s Credit Rating Downgraded by S&P With Recovery Unlikely

“We do not believe AMC has sufficient sources of liquidity to cover its expected negative cash flows past mid-summer,” S&P analysts wrote

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S&P Global on Thursday downgraded its credit rating for AMC Entertainment to CCC- from B, which takes the company from “Highly speculative” to “Default imminent, with little prospect for recovery.”

AMC has been rocked as a result of the novel coronavirus pandemic, which has forced all movie theaters to close and Hollywood studios to either push film releases past the pivotal summer months or take them off the slate for 2020 altogether.

“While there is a high degree of uncertainty about the rate of the coronavirus’ spread and when the pandemic will peak, some government authorities estimate that the peak will occur between June and August,” S&P analysts wrote in a note on Thursday. “We expect AMC Entertainment Holdings Inc.’s (AMC) theaters will remain closed beyond June due to the impact of the global coronavirus pandemic. We do not believe AMC has sufficient sources of liquidity to cover its expected negative cash flows past mid-summer, and we believe the company will likely breach its 6x net senior secured leverage covenant when tested on Sept. 30, 2020, absent a waiver from its lenders.”

AMC is the nation’s largest cinema chain, and it’s drowning in debt. The company reported a $5 billion-plus deficit at the end of 2019 and losses of $149 million for the year (after recording a $110 million profit in 2018).

During the company’s most recent fourth-quarter conference call, AMC CEO Adam Aron said that he and other top executives had agreed to cut their salaries and bonuses for three years in exchange for stock that would only vest if the share price doubles.

Last week, S&P had already knocked AMC’s credit outlook to negative from stable. Having a solid credit footing, especially now is important for companies as a means to raise cash to help float their businesses during the shutdown.

AMC also furloughed 600 corporate employees last week, including CEO Adam Aron.

“Even after significantly lowering its fixed costs and capital spending requirements, we only expect the company’s liquidity sources to last through mid-summer and are revising our assessment of AMC’s liquidity to weak” analysts wrote. “The company will likely pursue incremental financing through the CARES act or its lenders, but it is unclear when or if it will be able to secure additional liquidity.

“While unlikely, we could raise the rating if AMC were able to secure additional liquidity without further burdening its capital structure and if we expected the company would be able to generate substantial cash flow in 2021,” they continued. “This would likely require conclusive knowledge about the length of the theater closures and a view that the box office would return to normalized levels in 2021.”

AMC spent millions to build up its A-List service, an alternative to the now-defunct MoviePass that has lured 900,000 subscribers since its June 2018 launch but only turned a profit in the most recent fourth quarter.

In recent years, the company has also gone on an acquisition spree, buying Odeon and UCI Cinemas Holdings along with Carmike Cinemas in 2016, and Nordic Cinema Group in 2017.

For a while, AMC had a financial parachute from Chinese conglomerate Dalian Wanda, which acquired a majority stake in 2012. But in 2018 Wanda scaled down its position in the theater chain as Chinese regulators incentivized companies to cut back on their foreign holdings. AMC then turned to private equity firm Silver Lake, closing a $600 million investment in September 2018.

Not only has the spread of the coronavirus led to the closure of AMC and its rivals’ theaters, but it threatens to upend studios’ theatrical and business models. Studios have delayed productions and pushed release dates, and worse, some have decided to squeeze the theatrical window between an in-theater and video-on-demand home releases on titles like Warner Bros.’ “Birds of Prey” and Universal’s “Trolls World Tour.”

The writing’s been on the wall so long in fact that in October AMC entered the home entertainment business, launching a video-on-demand service that will be available to members of its AMC Stubs customer loyalty program.

There are many questions that remain unanswerable, including how long the shutdown will last — and how quickly consumers will return to cinemas even if the pandemic subsides.