AMC Entertainment (NYSE:AMC) stock is in full focus today following a report that credit rating and risk management firm Moody’s has downgraded the credit ratings of several companies. The number of companies with a rating of B3 negative of lower, which includes AMC stock, tallied in at 227. That signifies a rise of 4% compared to the fourth quarter and about a 33% increase compared to Q1 2022. It is also the “highest quarterly figure since August 2021” although still below the peak witnessed during the beginnings of the pandemic.
A big factor contributing to the increased number of companies facing speculative credit ratings is the interest rate. With a higher rate, companies are finding it more difficult to borrow money at a reasonable cost.
“The rise in interest rates materially increased the debt-service costs on some of these companies’ floating-rate debt, resulting in weaker interest coverage,” explained Moody’s analysts.
Meanwhile, the pain doesn’t seem to be over. Moody’s forecasts that corporate defaults will increase to 5.6% during the upcoming year, up from the current level of 2.7%.
AMC Stock Alert: Moody’s Sounds the Debt Alarm on AMC
A credit rating of B3 or lower means that a company’s credit is extremely speculative and is classified as “junk.” In order to receive a non-junk rating, a company’s credit must be rated at least Baa3. However, the Baa3 rating is several steps above the B3 rating. A jump to Baa3 from B3 won’t happen overnight.
Still, AMC has seemingly found a way to sidestep tightened lending conditions with its AMC Entertainment Preferred Equity Units (NYSE:APE). At its recent special meeting of stockholders, proposals to increase shares outstanding to 550 million and to enact a 1-for-10 AMC reverse stock split were approved. The approval of these proposals opens up the way to convert all outstanding APE into AMC.
On the other hand, a major roadblock stands in the way of the reverse split. A class action filed against the company resulted in a court-enforced status quo order that would halt the implementation of the recently approved proposals. AMC reached a settlement with the class action filers to lift the order, although the court denied the motion. On April 27, a hearing will decide whether the order will still remain in place.
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On the date of publication, Eddie Pan did not hold (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.