In our a$$-kicking July 24, 2024 briefing …
… we dove deeeeeeeeeeeep into AMC Entertainment Holdings Inc’s recently effectuated liability management transaction. ICYMI, we basically call AMC’s CEO, Adam Aron, a f*cking liar. It’s worth a read if you never got around to it.
Bloomberg reported that Marathon Asset Management was a big driver of the deal that swapped a significant amount of the two near-term ‘26 maturities — (i) ~$1.1b of the $1.9b of senior secured term loan and (ii) ~$519mm of the $950mm of 10%/12% Cash/PIK Toggle second lien subordinated notes — for new longer-dated (and, in the case of the new first lien issuance, generally more expensive) ‘29 and ‘30 paper collateralized by 175 of AMC’s best theatres and its intellectual property.
The upshot of the transaction is that, in true amend and extend fashion, it gives AMC an additional three years to figure sh*t out in the face of some worrisome trends. Trends like declining revenue. Increased streaming competition. Decreased frequency of theatre attendance. Etc. etc. Despite all of that, and in connection with the deal, Marathon’s Bruce Richards was beating his chest:*
Of course, while Bruce be Bruce’ing the lawyers be lawyering. We reckon there are (at least) three different groups that have gone full on Andrew Garfield and “lawyered up,” seeking advice as to options.
The left-behind or “non-participating” holders of the original senior secured term loan due ‘26 who have seen their liens subordinated by a simple majority and are now weighing whether to join the new deal or hold out;
The left behind 10%/12% Cash/PIK Toggle second lien subordinated noteholders who have seen their liens stripped by two-thirds of their former co-holders; and
The holders of the $950mm of first lien senior secured notes due in ‘29 — paper high in the cap stack, senior to the exchanged 10%/12% Cash/PIK Toggle second lien subordinated notes, but not part of the deal — who are wondering whether the new deal violated debt covenants. According to Bloomberg:
Some 7.5% noteholders are arguing that the new deal favors second-lien creditors, while stripping higher-ranking creditors of collateral and pushing them down the repayment line, said the people, who asked not to be identified discussing a private matter. The holders are pointing to language in bond documents that says AMC can’t provide more favorable terms to junior-ranking debt holders, the people said. Discussions are in the early stages and no action has been taken, the people added.
🙄
Anyway, back to Bruce. Time will tell whether these projections pan out or end up being akin to disclosure statement projections, lol:
In fairness to both Mr. Aron and Mr. Richards, we also recognized, amidst the negativity, that the theatre space was potentially on the verge of some very very much-needed good news: a big bump from Hugh Jackman and Ryan Reynolds’ Deadpool & Wolverine feature which, in the lead up to its release, had been tracking for a record — for an R-rated film — $160-$165mm domestic release.
So, how’d it do?
It slashed expectations (see what we did there?).
It appears the superhero movie scored approximately $205mm in domestic sales, far exceeding even the rosiest of expectations. Tack on a massive $233mm haul overseas and there’s no doubting the pairing of these two characters is a monster success.
And so it’s time to update those YTD comparisons. In our previous piece, we noted that the ‘24 box office had, as of July 21, 2024, experienced “…a 16% YTD drop from last year and a 34.8% decline versus the last full pre-pandemic year of ‘19.” Surely the massive box office weekend dramatically improves upon that, right?
RIGHT?
Okie, not so much. Similarly, the market doesn’t seem all-too-impressed either:
The price is literally the same as it was at market open last Wednesday, July 24, 2024.
But we’ll let Mr. Aron have his celebration anyway:
The funniest part? People went and got sh*t-faced while seeing it. Per a shamelessly boastful AMC press release:
The success at AMC wasn’t limited to the big screen. The Company posted its highest food & beverage revenue for a single weekend since 2019, driven in part by record sales at the MacGuffins bars located in about two-thirds of AMC’s U.S. theatres. In the U.S., AMC sold more beer, wine, and cocktails during the Thursday-Sunday weekend than in any other weekend in AMC company history.
Also popular with guests was the DEADPOOL & WOLVERINE merchandise, which was completely sold out during the weekend. With multiple popcorn buckets to choose from, as well as collectable drink toppers and other fun merchandise, DEADPOOL & WOLVERINE is now AMC’s highest revenue-generating merchandise program of the year, eclipsing DESPICABLE ME 4, which had just claimed that title earlier this month. DEADPOOL & WOLVERINE is now AMC’s second highest merchandise program in AMC company history (behind only the AMC merchandise program launched in 2023 for the TAYLOR SWIFT | THE ERAS TOUR concert film).
Lol, “merchandise.” Like this ⬇️, 🫢?
Even Harrison Ford was like, W.T.F.
This is going to be a long three years.
*Marathon reportedly got in on the now-exchanged debt at steeply distressed prices so Bruce has already made good money on this name.
😎Notice of Appearance - Ajay Bijoor, Managing Director & Head of Capital Structure Advisory at Baird😎
Today we’re bringing back our inert “Notice of Appearance” series with a bang. We’re joined by our first ever investment banker participant, Ajay Bijoor, Managing Director & Head of Capital Structure Advisory at Baird. Let’s jump in.
PETITION: Hi Ajay. Thank you for doing this. As noted in the introduction, you’re our first ever NOA with an investment banker. No pressure! Let’s dive right in: at a high level, what would you say has been the biggest development in the macroeconomy in the first half of ‘24? And what do you anticipate for the second half?
Ajay: Thank you, I’m honored. You must have exhausted the 2024 PETITION 1,000,000 Leading Global Bankruptcy & Restructuring Lawyers/Bankers list. That’s quite some effort to get to me. Speaking of effort, PETITION is fantastic and your meme department’s game is on point.
The most significant macro development, setting aside global geopolitical affairs, is the deferral of rate cuts. At the end of 2023, there was anticipation that 2024 would be the year for rate cuts. S&P 500 was up 25% for the first half, but the Mag 7 was up 31%, and NVIDIA, Microsoft, and Alphabet posted a 49% gain in this time period.
As it relates to 2H, I had the luxury of listening to Jim Grant at a Strategas conference — he spelled out the future alternatives pretty clearly. Though the Fed is not explicitly a political agency, it is influenced by the president’s agenda. So, we might see a 25-point cut this fall, but the Fed won’t be making any sudden movements right before the election. If there is a second Trump presidency, the Fed will reconsider its 2% inflation target, implying an acceleration of rate cuts. I think the balance of 2024 will essentially look like the first half, and the market is anticipating additional rate cuts into 2025.
PETITION: Zooming in a bit, what has been the biggest development in the distressed/restructuring space in the first half of ‘24? And what do you anticipate for second half? From the calls that you and the team are fielding these days, what are some recurring themes?
Ajay: One big theme is the continuing impact of COVID-related supply chain swings. The liquidity issues are made more challenging by the elevated rate environment. Sectors where we see this include consumer, consumer-related businesses/services (e.g., packaging, logistics, etc.) and healthcare services. Another trend we see is over-leverage, compounded by the increase in base rates. RX watchlists are loaded with companies that raised debt over the past two years, but the difference in this next cycle is that there are a lot of good company/bad balance sheet situations.
A-E activity is high and 2024 is on pace to exceed 2023’s record of over $175bn in volume, indicating broader lender support to bridge to an improved market. Also, capital growth in private credit has added competition in the marketplace and is a viable alternative for companies requiring a flexible capital solution.
PETITION: Speaking of the Fed, a question about interest rates. We’re not going to get into the Fed prediction game, other than to say it appears rates will eventually settle at levels several hundred basis points higher than was the case from 2009 to 2022. Here is a handy chart from Apollo Global Management’s chief economist Dr. Torsten Sløk:
Not just “higher for longer,” but permanently higher. A terminal rate of 4%. Oh dear! How difficult will it be for middle-market names to adjust to permanently higher costs of capital?
Ajay: We take for granted that we had near-zero rates for an extended period, so it's all relative. The SOFR curve still supports a view of elevated rate levels for an extended time frame.
For higher LTV middle market companies, it will be a challenging period to navigate, particularly for the 2021/22 deals when more debt was raised at much lower base rates. The structured/hybrid equity market has grown to support these situations where fundamentally sound businesses have leverage and cash interest challenges.
PETITION: Speaking of middle market, you featured prominently in two recent middle market cases: Anagram Holdings LLC (which we last covered here, congrats on beating Silver Point Capital!) and KidKraft Inc. (which we covered here and then went on smoothly towards confirmation). Do you have any key takeaways from these recent middle market mandates? Middle market seems to be where most of the action is these days…
Ajay: We will continue to see a higher volume of mid market activity. Generally speaking, the liquidity issues take more work to navigate. The liquidity outlook can change on a dime. With that, we see it play out with a more challenging DIP budget negotiation and a focus on speed. As a result, there is even more focus on pre-negotiating the transaction. Partnership between debtors, creditor groups, and their advisors becomes even more critical to meeting timelines and reacting to unanticipated changes. Drawn-out negotiations are not an option. On KidKraft, Lauren Kanzer and the Vinson & Elkins LLP team carried the company to confirmation, but success was only possible with the support of the stakeholders and their advisors.
In the out-of-court context, we see some situations where companies needed liquidity injections yesterday, and vendors are stretched. Industry experience and history are even more critical in the middle market. Execution speed becomes critical, and we realize that our firm’s deep industry expertise helps lenders/third-party capital providers get up-to-speed on industry dynamics and business drivers at an accelerated pace.
PETITION: A question about liability management. There’s been a lot of debtors companies taking the LME route rather than filing — only for a filing to happen anyway (e.g., RobertShaw recently, and countless others). Does the increase in LME exercises (and out of court activity, generally) indicate a dissatisfaction with the bankruptcy process? Has the restructuring industry done enough to keep up with innovations in the broader market? Or does the only “innovation” regularly involve just figuring out new and complicated ways to screw over other creditors?
Ajay: LMEs preserve optionality for stakeholders but don’t guarantee any outcome. Granted, the shuffling of the deck of cards could make for a more contested bankruptcy, but LME innovation is an excellent thing for our market.
While some transactions are genuinely innovative and get replicated over time, I think overly structured deals sometimes lose sight of the bigger picture … what does the company actually need? If the LME does not address the required liquidity or timeframe, the company is probably destined to continue along its course and that could involve another restructuring.
PETITION: Our prior questions really cover the present state of affairs. Let’s go back into the past for a sec. We saw you worked on Hornbeck Offshore while at Guggenheim. Todd Hornbeck was always blunt about the challenges the offshore oil and gas industry faces. His concerns persist, for some, today: Transocean LTD ($RIG) stock, for instance, is down 15% YTD; it hasn’t filed for bankruptcy. Valaris Ltd. ($VAL), on the other hand, has filed and it is up nearly 13% YTD. Hornbeck was nothing if not defiant against lender and bondholder groups who were leaning on him to do a deal. He fought the good fight, but the company eventually filed. What was it like working on that situation? What do you make of offshore going forward? And do you miss Houston?
Ajay: This goes back a few years. The negotiations started before the March 2020 COVID work-from-home mandate but continued after that when all our families were privy to umpteen Project Names. WTI even went negative in April. The volatility in the market was hard to predict. The OSV business is highly scalable, and OSV day rates/revenue can swing dramatically to the upside, so it makes sense to play out the option when you can. Todd and his family laid the groundwork for the OSV industry, and he carries that legacy, passion, and commitment to the business.
I have tremendous respect for Todd Hornbeck, Jim, Sam, and the whole management team. The success of the negotiations hinged on the inseparability of Hornbeck, the individual, the family, and Hornbeck, the company. We saw that he truly cares about his customers and employees, and luckily the stakeholders appreciated that sentiment in aligning interests.
Oh, on Houston, HOSS was based in Louisiana, so we spent most of the time with the Company. I miss Cajun food more than I miss the steaks in Houston.
PETITION: Another energy question. This time about the energy transition. We’ve written about the slowing demand for electric vehicles. General Motors Co. ($GM) and Tesla Inc. ($TSLA) both cut EV sales forecasts. Lots of solar and “green power” entities going bankrupt, like iSun Inc. ($ISUN). The federal government allocated $7.5b to new charging stations and somehow managed to produce only seven. Nevertheless, the International Energy Association swears that demand for electric vehicles is on track. There seems to be a bit of a disconnect somewhere. Thoughts? Is this just an adoption curve issue?
Ajay: First off, I still love Tesla, although I know many of my friends have moved on to Rivian or Lucid. In the near term, the flood of relatively cheap used EVs in the market will foster some adoption from less eco-conscious types. The current slowdown is a temporary lull during the early phases of broader adoption. We still need to invest in charging infrastructure and battery technology, so we are showing short-term constraints. I am optimistic about the long term because the US will continue to make technological advancements, and there will be further policy support.
PETITION: What is your favorite thing about the bankruptcy code? On the flip side, you must have some thoughts about inefficiencies in bankruptcy: what is f*cked and needs fixing? If you could implore Congress to take action about one thing, what would it be?
Ajay: What I appreciate most about the bankruptcy code is that it forces resolution. As for what needs to be fixed, I'll leave that to my more highly compensated legal friends to opine.
PETITION: What are some of the biggest changes you’ve witnessed happen to the business of bankruptcy over the course of your career? One thing we’ll highlight is that it just seems like lawyers/bankers have switched status: it used to be the bankers were the one’s running around making the big baseball-style dollars but now that seems to be the lawyers while banker fees/comp has flat-lined. Is that right? What do you say?
Ajay: The most significant shift I've noticed is the surge in professionals in this arena. [hmm, Petition’s 2024 1,000,000?]. I still love the team I grew up with Miller Buckfire pre-global financial crisis; they shaped my career. Nowadays, we've all ventured off in different directions and often find ourselves as rivals in various deals. Healthy competition drives innovation and delivers optimized results. I believe that the best innovation involves collaborative effort between bankers and lawyers, and both should be compensated for the value we provide.
PETITION: What is the best piece of professional advice that you’ve ever gotten and why? Please lay some wisdom down on our readers who may be at the initial stage of their careers.
Ajay: I rely on several gurus, including those in my family. If I were to pick one piece of advice to share for the next-gen, my negotiations professor, Stuart Diamond, taught me that getting to a “yes” does not have to be a zero-sum game. Strive for both sides to win, and the pie is expanded.
PETITION: Finally, you’ve likely noticed that we like to snark “Long ABC” or “Short XYZ.” What are you “long” these days? What are you “short”? Feel free to be creative here but please list one thing that’s legal/financial and one thing that’s … well … whatever. You cannot go “long” the Phillies: that’s too much of a softball given the way they’re playing these days, 😜.
Ajay:
Long — Higher for longer rates. Private credit. The “Brooklynization” of cities/towns (e.g., Omaha, OKC, Madison).
Short — NY Giants … go Eagles!
PETITION: Thank you so much for participating, Ajay. 👍
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.