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Default risk looms large for AMC as a few European theaters resume operation

AMC Entertainment Holdings Inc. is raising red flags about its future, even as it begins opening theaters in Europe.

After postponing its first-quarter earnings release in April, the theater operator on June 3 provided preliminary first-quarter earnings estimates, disclosed a going-concern warning and announced a distressed debt exchange that represents a default from a credit ratings perspective.

Following the June 3 filing, S&P Global Ratings downgraded AMC's issuer credit rating to CC, and it issued a negative outlook. The agency expects the company will take an SD rating following the completion of the debt exchange.

"We would consider the completion of the proposed exchange as tantamount to a default because noteholders would receive less than the original par amount of the notes," S&P Global Ratings said in its downgrade commentary.

The loan restructuring would increase AMC's interest to its debtholders significantly. The new notes will carry a 12% coupon rate, while the highest coupon rate on the existing notes is 6.375%. The exchange will only extend AMC's soonest obligations by a couple years, with existing notes due between 2024 and 2027 and the new notes due 2026, but it will reduce AMC's maturity payments and potentially shield it and its debtholders from a bankruptcy filing. Debtholders would collect about $520 to $530 for every $1,000 outstanding if they agree to an exchange before June 16, according to S&P Global Ratings.

Prior to the current proposed exchange, AMC in April closed a $500 million first-lien note offering at a 10.5% interest rate, and AMC's largest shareholder Dalian Wanda Group Co Ltd. dismissed bankruptcy rumors. The company in its first-quarter estimates said it had a cash balance of $718.3 million as of April 30, which also included fully extended borrowings under a $225 million U.S. credit facility and a European facility amounting to about $124.6 million.

Despite Dalian's assurances, AMC has been on the Restructuring Watchlist, which is compiled by LCD, an offering of S&P Global Market Intelligence. The list includes companies at risk of restructuring over the next 12 months.

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Few other technology, media and telecommunications companies appear on the LCD Restructuring Watchlist, but one other name on the list is Cirque du Soleil Inc., which missed a March principle and amortization payment. Since then, the special-events organizer tapped its private equity co-owner TPG Capital LP for $50 million in emergency financing, a move that angered Cirque du Soleil's existing debtholders, who accused TPG Capital of attempting to shield itself from the impending bankruptcy, according to The New York Post.

Both AMC and Cirque du Soleil were hit hard by the coronavirus pandemic, which forced the closure of events that included large gatherings, the primary revenue driver for both companies. AMC in March shuttered its 1,000 global theater locations and furloughed or laid off the approximately 27,000 employees operating those. Cirque du Soleil also temporarily laid off 4,679 employees, following the closure of 44 productions globally.

READ MORE: Sign up for our weekly coronavirus newsletter here and read our latest coverage on the crisis here.

However, while the theater business has effectively ground to a halt in the wake of the pandemic, AMC's largest U.S.-based competitor Cinemark Holdings Inc. is notably absent from the LCD watch list, and analysts have been more positive on that exhibitor. The two companies carry very different balance sheets, where at the end of 2019, AMC had a total debt-to-equity ratio of 8.53x, compared to Cinemark's 2.34x.

"We continue to view Cinemark as a well-managed company with the most stable results in the industry, and therefore the best name to own within the space," Wedbush Securities analyst Michael Pachter said in a June 3 note reiterating his outperform rating on Cinemark and holding a $20 price target. Pachter has a "neutral" rating and a $3 price target on AMC. As of June 3 close, AMC shares were at $5.45, and Cinemark was at $16.34.

Cinemark can likely withstand closures through early 2021, Pachter said. By contrast, AMC flagged its ability to continue its business as contingent on reopening theaters in the next few months.

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"We believe we have the cash resources to reopen our theatres and resume our operations this summer or later. Our liquidity needs thereafter will depend, among other things, on the timing of a full resumption of operations, the timing of movie releases and our ability to generate revenues," the company said in its earnings filing.

AMC could resume generating at least some revenue soon. On the same day as its first-quarter preliminary earnings release, AMC said it began reopening European theaters, beginning in Norway, under new health and safety protocols.

If it cannot reopen more theaters in a timely manner or if the theater business remains pressured after reopening, and if the company cannot secure adequate financing to fund that recovery, "substantial doubt exists about our ability to continue as a going concern," AMC said.