Why rising interest rates could be devastating for AMC Entertainment

AMC Entertainment Holdings (AMC 2.55%) is struggling to contain the adverse effects of the pandemic. Month-long closures of its theaters have taken revenue to near zero and forced management to take emergency action to keep the business afloat.

Moviegoers are coming back, but nowhere near the rate AMC needs to break even. With billions in debt coming due, refinancing seems like the only option. That said, interest rates are rising rapidly. If the trend continues, it could be devastating for AMC.

Image source: Getty Images.

AMC has a heavy debt

Indeed, AMC has two separate loans maturing in 2026. One is for $1.5 billion and the other is for $1.94 billion. The latter bears interest at 3.35%, and this rate is likely to increase considerably when AMC refinances itself. The former costs AMC 10% if paying in cash or 12% if paying by any other method. It is unlikely that when 2026 rolls around, AMC will have enough cash to pay the principal of these loans.

Table of AMC's total long-term debt (annual)

Total CMA long-term debt (annual). Data by YCharts.

As of March 31, AMC held $1.16 billion in cash on the balance sheet, compared to $1.59 billion in the same period last year. Its balance sheet was infused with more than a billion dollars in cash thanks to the stock market frenzy that allowed management to sell shares at exorbitant prices.

That lifeline ran out, and when management tried to get shareholders to allow more share sales, their disapproval of the idea forced management to scrap the plan.

Fortunately, AMC’s business rebounded as blockbusters brought viewers back to the movies. In its most recent quarter, revenue increased fivefold from the same period a year earlier. Unfortunately, AMC lost $295 million in cash from its operations, even with the boost. It’s going in the opposite direction rather than making money to prepare to pay off debt.

AMC Statement of Cash Flow from Operations (Quarterly)

AMC Operating Cash (Quarterly). Data by YCharts.

There remains another option: refinance the debt. AMC did something similar recently. It issued about $950 million in new bonds in February at 7.5% interest. He used the funds to pay off old debt due in 2025 and 2026, costing AMC 10.5%. This decision will allow the company to save on interest costs.

However, interest rates are rising, and it’s unclear whether AMC can secure similar terms if it decides to follow the same plan to pay off the $3.4 billion in debt it’s still due in 2026. The company already struggling to break even, the gradual increase in interest charges could be overwhelming.

What this could mean for AMC investors

AMC Operating Revenue Table (Annual)

AMC operating profit (annual). Data by YCharts. TTM = last 12 months.

AMC has paid $387 million in interest charges over the past 12 months. Over the previous decade, the company’s highest operating profit was $310 million in 2018. So while it may return to pre-outbreak performance levels, it probably won’t be enough. not to pay its debit interest at the rate of the previous 12 months.

It’s a troubling scenario for investors, of course. If you still own this stock, you might want to sell it before it’s too late.

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