AMC Theatres "Bankruptcy Appears Likely," Analyst Says

MKM Partners' Eric Handler downgrades the stock to a "sell," estimating its "cash burn rate in a no-revenue environment is running at $155 million per month, which likely keeps AMC liquid until June/July."

Wall Street analysts are seeing a Chapter 11 bankruptcy filing from cinema giant AMC Theatres as increasingly likely.

MKM Partners analyst Eric Handler on Thursday downgraded his rating on shares of the exhibitor from "neutral" to "sell," saying that "bankruptcy appears likely."

That followed Loop Capital analyst Alan Gould's Wednesday downgrade to a "sell" in a report that concluded: "We think bankruptcy is a distinct possibility, and at a minimum, the company will require a highly-dilutive financing."

Handler in his Thursday report explained: "Based on our view that theaters will be closed until at least August and our belief that AMC lacks the liquidity to stay afloat until that time, we expect the company will soon be faced with filing for bankruptcy. Further fueling our liquidity concerns is AMC's decision to stop paying rents to landlords effective April."

AMC, in which Chinese conglomerate Dalian Wanda Group owns a majority voting stake, has been looking for various ways to reduce costs, furloughing all of its 600 corporate employees, including CEO Adam Aron, in late March following the closure of all its cinemas. It had earlier already cut its dividend by 85 percent.

Handler said though that even if AMC is able to tap government bailout funds, as management has signaled it plans to do, "we believe the weight of its balance sheet will make for tough sledding given the company's high leverage, thus making a reorganization inevitable." That comment was a reference to a potential Chapter 11 bankruptcy filing, which leads companies, their lenders and a court to develop a restructuring plan.

Handler highlighted that AMC, which he called "the exhibition company we view with the least financial flexibility," at the end of 2019 had $265 million of cash on hand and $332 million available on its credit lines for a total of nearly $600 million. "We believe the company's monthly cash burn rate in a no-revenue environment is running at $155 million per month, which likely keeps AMC liquid until June/July," he concluded.

Handler cut his fair value estimate for AMC's stock from $7.50 to $1 and lowered his first-quarter financial estimates. He cut his adjusted earnings before interest, taxes, depreciation and amortization estimates to a loss of $13 million, compared with a year-ago profit of $108 million. His revenue estimate went down to $931 million, reflecting "a domestic box office decline of 26 percent as theaters have been shuttered since mid-March and a 20 percent decline internationally."

Handler also cut his 2020 outlook for AMC's adjusted EBITDA to a loss of $293 million, compared with a $771 million profit in 2019. Full-year revenue he expects to fall 44 percent to $3.05 billion. The revisions assume cinemas remain closed until August.