Last week, the two-day hearing to discuss the conversion of AMC Preferred Equity Units (NYSE:APE) into AMC Entertainment (NYSE:AMC) concluded, although shareholders will have to wait a bit longer until Vice Chancellor Morgan Zurn makes her final decision. Zurn did not provide a specific date on when she would make a decision, although she noted that it would not come this week. This came after Special Master Corinne Elise Amato issued a recommendation in favor of the conversion.
Since then, the cost to borrow (CTB) fee for AMC stock has exploded higher. The CTB fee currently tallies in at 947%. That’s compared to a reading of 855% yesterday and 197% on June 26. Generally, a stock has an average CTB fee between 0.3% and 3%, which means that AMC’s CTB is extremely elevated.
AMC Stock CTB Fee Surges Higher
The CTB fee increases when short seller demand is high and falls when demand is low. A high CTB fee can also influence short sellers to sell out of their existing positions by buying the underlying stock in an attempt to escape the high fee. What this means is that a high CTB fee can actually add to the effects of a short squeeze.
As of June 15, there were 122.09 million shares of AMC stock sold short. That’s equivalent to a high short interest as a percentage of float of 23.64%, which increased by 4.52% compared to the last reading on May 31. With the CTB fee rising significantly in recent days, investors could rationalize that short interest has increased since June 15.
There is certainly reason to short AMC stock, as the conversion of APE into AMC would dilute existing AMC shareholders. In theory, both classes of stock represent the same company and have the same voting rights, which would mean that the prices of AMC and APE should converge upon a successful conversion. However, AMC is currently priced higher than APE by about $2.40 at the time of this writing.
According to The Street, many Wall Street analysts believe that the conversion will be successful. Arbitrage traders have taken advantage of the situation as well, as evident by the high CTB fee.
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.
