Much of the focus over the last week has been on the chaos that Reddit has caused on the public markets. While journalists have been asking about what the implications are going to be, long term, for market participants after a simple online forum unleashed millions of angry retail daytraders unto otherwise docile capital markets, something else was happening in the background.
This same group of retail traders were likely saving two businesses. AMC and American Airlines, both cash burning entities feeling the hit of the pandemic, will be able to offer fresh stock at inflated prices thanks to the recent run up. This means that both businesses – previously very likely to be slated for a tough 2021, financially – will now instead be more flush with cash coming out of the back end of the global pandemic.
Bill Housey, a senior portfolio manager at First Trust Advisors, who previously invested in AMC, told Bloomberg this weekend: “We certainly didn’t have a row for ‘surprise equity offering’ in our AMC model. Companies that were otherwise facing real financial challenges are finding an unexpected source of capital.”
Both AMC and American Airlines last week sold hundreds of millions of dollars worth of shares. Their creditors also made out well, as Bloomberg noted:
Besides the companies themselves, there’s perhaps no bigger winner from the massive stroke of good fortune than their creditors. Just weeks ago many were staring at the possibility of significant losses as pandemic-fueled slumps had traders betting up the odds of default. Now the companies are suddenly in a position to raise fresh piles of cash to weather the storm, and could even use the funds to start paying down debt.
American said on Friday it would sell as much as $1.1 billion in stock through an ATM offering and AMC, days earlier, had said it raised $300 million through a similar program. Investor Silver Lake converted $600 million in AMC bonds to equity and sold them for a $100 million goal.
AMC is reportedly considering additional stock sales to raise cash, Bloomberg says. Lloyd Sprung, head of debt advisory and restructuring at UBS Investment Bank, said: “They can use the cash to pay down debt, selectively fund open-market debt repurchases, tenders or targeted exchange offers.”
American had paid 11.75% to raise $2.5 billion back in June. AMC had taken out a $547 million loan against its Odeon Cinemas unit that will cost it up to 11.25%. Both companies now have a chance to extinguish some of that expensive debt. In turn, AAL debt has rallied thanks to the boost in its equity:
After rallying the past four days, American Airlines’ 5% unsecured notes due June 2022 now yield less than 1,000 basis points more than similar-maturity Treasuries for the first time since March 2020. AMC’s benchmark 12% bonds due 2026, meanwhile, have climbed from about 22 cents on the dollar at year-end to 74 cents on Friday, though they still yield over 18%.
It’s likely that GameStop – and other names targeted by WallStreetBets – take similar action.
What’s great is that the boost in $AMC shares may actually allow them to issue equity, prevent bankruptcy, and save the company. So #SaveAMC, which is trending in some part just to get interest in randos buying the stock, may actually be apropos. Kinda cool
— Quoth the Raven (@QTRResearch) January 27, 2021