There’s a certain B-word that investors in AMC Entertainment (NYSE:AMC) typically don’t like to hear. That word is bankruptcy, and unfortunately it’s a topic that AMC stock holders won’t be able to avoid.
As of Dec. 29, the company has managed to avoid filing for Chapter 11 bankruptcy protection. Perhaps AMC Entertainment ought to be commended for that.
After all, the AMC stock bulls have been predicting the company’s downfall, and even its extinction, since the onset of the novel coronavirus. Since the company’s still around, it might be tempting to jump into AMC stock with a long position.
However, there’s reason to believe that the pressure for AMC Entertainment to declare bankruptcy might be too strong for the company to resist. Today we’ll delve into the specifics of this dire situation, but first let’s focus on the ups and downs of AMC stock.
A Closer Look at AMC Stock
To be frank, AMC stock was in a state of decline even before the coronavirus came to America this year. The stock bumped its head against the $35 resistance level in 2015 and then again in 2016, but then a multi-year decline commenced.
Probably due to competition from various streaming services, AMC stock fell sharply from 2017 to 2020. Then came Covid-19, and AMC shares plunged to a horrendous low of $1.95 in March of 2020.
The AMC stock bulls have made valiant attempts to push the share price back up. There was one spike toward the $7 level in June, and then another one in September.
Yet, on the morning of Dec. 24, the AMC stock price was down to $2.55. And, AMC’s trailing 12-month earnings per share was -$34.81, which certainly isn’t good.
Theater of Pain
In case the problems arising from streaming services and from Covid-19 weren’t enough, now AMC Entertainment has several creditors on its back. So, let’s delve into the details.
It appears that a new viral strain may be spreading in the United Kingdom. Possibly as a result of this, recently three of AMC Entertainment’s creditors are pressuring the company to file for bankruptcy.
Those lenders have even gone so far as to offer AMC Entertainment $1 billion worth of debtor-in-possession (DIP) financing if the theater operator agrees to declare bankruptcy.
This begs a couple of questions. First, why would those creditors so badly want AMC Entertainment to file for bankruptcy? And, would it make sense for AMC to do so?
On top of all that, AMC stock traders must consider whether it makes sense to take a chance and hold on to the shares.
AMC Needs a Lifeline
As of Dec. 14, AMC Entertainment needed more than $750 million just to make it through 2021. Clearly, the company is in serious financial straits.
This makes is crystal clear why AMC might decide to file for bankruptcy. The company could use the $1 billion DIP financing to cover some or all of its debt. Plus, bankruptcy offers some measure of legal protection.
As for the three aforementioned creditors, if AMC accepts the deal, then those lenders would basically jump to the front of the line in terms of the creditors who currently control AMC.
As you can see, it looks like all of the involved parties could benefit if AMC declares bankruptcy. But then, not all of the parties would necessarily benefit, as AMC’s existing shareholders might not be protected from capital loss if the company goes bankrupt.
To put it another way, the current AMC stock holders could get the short end of the stick. That’s probably not a chance that cautious investors would want to take.
The Bottom Line
Both AMC Entertainment and several of the company’s creditors could derive benefits from the theater chain declaring bankruptcy.
When the dust settles, however, AMC stock owners might not have any protection at all. As a result, it’s probably best to avoid the stock for the time being.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.