In the wake of a S&P Global report that forecasted AMC Entertainment’s depletion of cash by mid-summer and its potential inability to re-open by June, media reports have already written the chain’s obituary.

But hold on one moment.

Shutterstock

While distribution and rival exhibition sources wouldn’t be shocked if AMC files Chapter 11 in the near future, that’s not necessarily a scarlet letter for the biggest theater chain in the world. Rather it’s the best thing that could happen for AMC which is saddled with $4.9 billion debt and currently valued at $327.3M. Last Wednesday, the Wall Street Journal reported that lenders for the Leawood, KS-based chain have hired law firm Gibson, Dunn & Crutcher LLP for advice on expected restructuring negotiations.

Also, should AMC file for bankruptcy, that doesn’t mean that theatrical exhibition and moviegoing is dead. AMC can still re-open under Chapter 11 according to sources and that’s because studios and distributors are likely to be deemed by a bankruptcy court as critical vendors. In bankruptcy lingo, a critical vendor is one with a specialized skillset, mandatory safety certification or proprietary product whose discontinuation of service would have a significant negative impact on a debtor’s operations.

The lobby of the AMC Empire 25 in NYC sits empty after the city closed down cinemas. Yuki Iwamura/AP/Shutterstock

Explained in layman’s terms, movies from studios are the primary means by which AMC makes money, before popcorn or Coca-Cola. AMC on average reps 20%-25% of a wide release’s opening weekend gross, or up to 30% on a great weekend. While an attrition in AMC locations is to be expected, studio distribution heads aren’t anticipating the chain’s demise. In fact, we hear AMC is already reaching out to find out what catalog titles are available from the majors for an anticipated May re-opening. Exactly where AMC reopens its 630 U.S. locations remains a question at this point in time. Should New York city, which is currently battling over 76K COVID-19 cases, continue to have cinemas closed throughout the summer, we understand that the majors would likely forgo the opening of an event title under such circumstances.

Who gets hurt the most here in an AMC bankruptcy equation are landlords. According to AMC’s 10-K, the chain leases 875 theaters (10,1k screens) and owns or partially owns 62 theaters (561 screens) worldwide. Stateside, AMC manages or has a partial interest in seven theatres and 73 screens. Sources further inform us that landlords aren’t typically high up on the debtor food chain, like studios are, and in such cases AMC would go in an either renegotiate or shed leases. In such cases, mall landlords would likely re-negotiate terms given how cinemas spur foot traffic to other neighboring retail establishments and restaurants.

Already, AMC is sending a note around to landlords that they’re ceasing to pay rent effective this month (you can read that note from AMC’s SVP of Development and International, David Ellis here). In the letter, AMC notes that they’ve furloughed 25K employees, instituted a reduced pay program for general theatre managers, placing a hold on discretionary expenditures and making pay/employee cuts at their corporate headquarters in an effort to re-open as soon as it’s safe to do so. AMC also informs their landlords that they “intend to advocate at the federal level for appropriate relief for the theatre and exhibition industries.” It’s not clear yet how much AMC or other big circuits will cash in from the $2 trillion relief bill passed by Congress, though businesses with under 500 employees look to have an edge.

In the states, distribution bosses expect AMC’s roughly 200 Classic Theatres –which were former Carmike venues– to be a logical casualty in the chain’s attrition of locations. Many of these theaters are $1 theaters, and aren’t big revenue generators. Ever since AMC paid $1.2 billion for Carmike back in 2016, the former Columbus, GA circuit’s locations have been an albatross around AMC’s neck.

Last week, S&P Global lowered AMC’s credit rating with a negative outlook, reflecting “our expectation that there could be a liquidity shortfall within the next six months absent some form of incremental financing. It also reflects the potential for a distressed debt exchange over the next six months, which we would view as akin to a default.” AMC’s junior bonds traded last Wednesday at 40 cents on the dollar, down from 80 cents at the start of March per MarketAxess.

Back in the 1999-2001 period, several exhibitors simultaneously declared bankruptcy including Regal, Carmike Cinemas (then No. 3 chain), Loews Cineplex (then No. 4), United Artists (then No. 6), General Cinema, Edwards Theatres, Mann Theatres, Dickinson Theatres and Silver Cinemas. In short, they expanded too fast. One of the big outcomes saw Regal absorbing Edwards and United Theaters while Loews merged with AMC in 2006. The consolidation continued, seeing Regal swallowed up by Cineworld of the U.K. and AMC acquired by Dalian Walda of China.

Yet throughout exhibition’s bankruptcy stretch during the early part of the millennium, studio sources tell Deadline: They weren’t burned.

An AMC representative didn’t respond Tuesday to a request for comment for this piece.

Below is AMC’s letter to landlords:

Dear Landlord:

This letter is to formally advise you that AMC temporarily suspended operation of all of its theatres in the United States (including the theatre referenced above) on March 17, 2020 in response to circumstances beyond AMC’s control and specifically the COVID-19 pandemic and the national state of emergency declared by the President of the United States on March 13, 2020, and in compliance with various federal, state and local government mandates and directives (including those that now limit public gatherings to no more than 10 people and emphasize social distancing). All other major theatre operators in the United States have also closed their theatres.

As the crisis unfolded and movie studios pulled major new releases (significantly reducing film product), AMC took steps to adapt and remain open. AMC proactively reduced capacity by 50% per the initial CDC guidelines, and then to 50 persons per auditorium per revised CDC. Some of the steps AMC has implemented are: (a) making the very difficult decision to furlough over 25,000 employees in the United States, (b) instituting a reduced pay program for theatre General Managers, (c) placing a hold on discretionary capital expenditures, and (d) making significant cost and personnel cuts at AMC’s corporate offices.

The final step AMC is currently taking directly impacts you. Without revenue from its theatres, AMC will cease paying rent and charges under the lease effective as of April, 2020.

AMC asks for your patience and understanding during this difficult time. AMC intends to reopen its theatres as soon as possible after it is safe to do so. AMC looks forward to getting back to business as usual.

AMC intends to advocate at the federal level for appropriate relief for the theatre exhibition and real estate industries. AMC is willing to discuss with you any suggestions you may have for getting through this crisis and planning for when AMC can reopen and pay rent.

Sincerely,

AMERICAN MULTI-CINEMA, INC.

Daniel E. Ellis

Senior Vice-President, Development & International