A deep-dive post on Reddit’s r/AMCStock and resulting posts on Twitter and YouTube are fueling interest in an AMC Entertainment (NYSE:AMC) theory today. The catalyst? A June 29 filing with the U.S. Securities and Exchange Commission dealing with senior convertible notes. As such, a frenzied army of AMC stock investors are spreading interest in #AMCBonds to share their theories.
So what do you need to know?
To start, Twitter is alight with the hashtag #AMCBonds this afternoon. Retail investing fanatics have taken a huge interest in convertible notes over the last day. Much of the interest centers around the company’s latest SEC filing, made on Tuesday. The filing requested a withdrawal of AMC’s S-3 registration from Dec. 14, 2018. Essentially, the S-3 allows a registered company an easy way to issue securities, like convertible notes or stock at its desired pace over a set number of years.
Typically, an S-3 filing is seen in a less-than-positive light for investors, as it opens up the possibility of share dilution for companies that are struggling.
Reddit Theory Points to Stock Shorting Via #AMCBonds
So how does this 2018 registration tie into short-selling and a trending Twitter hashtag?
In December 2018, AMC announced via SEC filing that it had entered into an agreement with Silver Lake, a prominent private equity firm. In this agreement, AMC sold Silver Lake $600 million in convertible senior notes that initially matured in September 2024.
Ultimately, during the first round of the r/WallStreetBets short squeeze, Silver Lake decided to convert its $600 million of senior notes to Class A common stock. This transaction happened at a per-share price of $13.51. Then, after making the conversion, Silver Lake sold its common stock for $713 million, netting it a handsome profit. For AMC, this reduced its indebtedness by $600 million.
Then, on June 29, AMC made its latest SEC filing. Because Silver Lake had already converted its senior notes, AMC was requesting to deregister them. But to some Redditors, this was evidence of something greater.
That is because in an S-3 filing, institutions can buy bonds which they can convert to stock. In this instance, Silver Lake ended up with a long position in AMC. As a few Redditors uncovered, institutions can hedge their positions by shorting the company along the way.
In a situation like this, bond holders continue to accrue interest — these bonds gain value through it all. And the kicker: If the company goes bankrupt, convertible note holders get paid equity before common shareholders. It’s a long, confusing and very clever way to bet on a company’s failure.
Are Short Sellers Really Scooping Up #AMCBonds?
Not so fast. Although the theory is gaining ground on social media, others have been quick to introduce other details. A second Redditor posted an updated theory challenging the initial deep-dive. Whereas before the belief was that this filing would recall all existing convertible notes, it simply closes out a deal with Silver Lake and cleans up AMC’s balance sheet.
Is it the exciting conspiracy that drove the AMC apes bananas last night and early this morning? Not exactly.
But, while this is not the huge victory that AMC Reddit and Twitter might have thought initially, it is still a positive move to limit the power of short sellers. CEO Adam Aron is once again proving his alignment with the Reddit crowd.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
