Nonetheless, balance sheet liquidity has improved modestly and Moody’s estimates pro forma cash balances of roughly $1 billion following issuance of $500 million10.5% Senior Secured First-Lien Notes in April and $300 million10.5% New First-Lien Notes that AMC raised in conjunction with the distressed exchange and balance sheet restructuring. The restructuring also included an amendment to the structure of the existing unrated $600 million 2.95% unsecured convertible notes held by SilverLake by granting them a first-lien priority position pari passu with the company’s existing senior secured credit facilities and $500 million 10.5% Senior Secured First-Lien Notes. The maturity of the amended convertibles were extended to 2026 from 2024. AMC also issued 5 million new common shares to some former holders of its senior subordinated notes who now hold the New Second-Lien Notes.

Financial leverage, however, has not declined materially following the distressed exchange given that pro forma gross debt outstanding was reduced by only 4%, or roughly $238 million. This is because AMC also issued $300 million of New First-Lien Notes funded with new money from existing note holders (SilverLake holds $100 million of the New First-Lien Notes), which partially compromised the effect of converting $2 billion of senior subordinated notes to $1.46 billion New Second-Lien Notes. More importantly, since the New Second-Lien Notes will accrete at a 12% rate, the principal balance will increase by roughly $265 million to around $1.725 billion by 31 December 2021, essentially canceling the 4% pro forma debt reduction. Hence, Moody’s continues to expect that leverage will remain well above or near the 9x area over the next two years given the company’s profitability and liquidity challenges resulting from the virus outbreak, economic recession and secular pressures facing the cinema industry.

The affirmation of the Caa3 CFR reflects the economic impact on AMC’s profitability, debt protection measures and liquidity from the forced closure of its global theatre circuit since mid-March as a result of the novel coronavirus (a.k.a. COVID-19) outbreak. AMC currently expects to gradually reopen most of its domestic theatres in mid-August, which was planned to coincide with the revised release schedule of two blockbuster films, Tenet and Mulan. The company initially planned to reopen its theatres by June, however this was subsequently postponed to July and then pushed to August because the debut of both films were repeatedly postponed due to the continuing spread of the virus in many parts of the US. Disney recently pulled Mulan indefinitely from the release schedule while Warner Bros.’ Tenet debut was revised to 26 August 2020 in overseas markets and 3 September 2020 in the US. The ratings reflect the five months of zero revenue generation arising from the suspension of most of AMC’s theatre operations and the possibility of further reopening delays.

Notably, Moody’s expects OTT video streaming services will reap benefits as film studios increasingly release movies to online platforms concurrently with their theatrical release or very soon thereafter as entertainment shifts back home during the pandemic. AMC recently signed an agreement with Universal Pictures that significantly shortens the theatrical window to only 17 days, or a film’s third weekend in theatres, from the typical 60 to 75 days. The theatrical window gives cinema operators exclusivity to show a film in its theatres for a period of time before the studios release the film to on-demand streaming platforms. In exchange, Universal will share a percentage of its streaming rental revenue with AMC.

Additionally, with the global economy in recession this year combined with the prospect of extended business closures, layoffs and high rates of unemployment, an erosion of consumer confidence will lead to a reduction in discretionary consumption. Given these economic realities, even when the company’s theatres reopen, Moody’s expects moviegoer demand will remain challenged as some consumers will avoid public gatherings to avoid the virus. Attendance will also be affected by reduced seating capacity and social distancing guidelines. Further, the supply of movies has also been impacted since the major film studios have postponed numerous releases that were scheduled to open during the summer months and production of films were also halted (though some have recently resumed production as certain regions have reopened). As such, the expected timing for reopening AMC’s theatres will negatively impact ticket sales, especially because cinema operators generate the majority of their annual revenue during the important May to early September box office season.

The Caa3 rating incorporates the risk of another potential balance sheet restructuring or bankruptcy filing to the extent AMC experiences further delays in reopening its theatres and/or weaker-than-expected moviegoer attendance after its theatres reopen.

AMC benefits from its national scale and diversity as the world’s largest movie exhibitor with operations in 44 US states and 14 countries overseas (13 European and one Middle Eastern) and leading market shares in most of its markets. Positive considerations include AMC’s variable cost structure that facilitated meaningful cost reductions in the short-run, as well as its business line diversity with admissions representing around 60% of total revenue and higher margin concessions accounting for 31%.

The negative outlook reflects Moody’s expectation for lower revenue and EBITDA this year and next year coupled with weakened liquidity as a result of the temporary closure of AMC’s theatre circuit and the secular attendance challenges facing the theatre industry. It also incorporates the numerous uncertainties related to the social considerations and economic impact from COVID-19 on AMC’s cash flows and liquidity, especially if the virus continues to spread in certain regions or resurfaces later this year, forcing AMC to keep some of its theatres closed for a protracted period, especially if the major film studios continue to postpone release of their movies or the company experiences a second suspension of its operations. The negative outlook embeds Moody’s view that AMC will face negative operating cash flows through Q4 2020 despite the company’s planned theatre reopenings in August. Moody’s is concerned that AMC’s liquidity could be exhausted in Q4 2020 or early 2021, which would require the company to seek additional external financing if it is unable to reopen most of its theatres as currently planned and/or moviegoer demand is weaker-than-expected when theatres reopen. The company’s statement in its Form 8k filing dated 3 June 2020 [2] casting substantial doubt as to whether it can continue as a going concern as a result of lower-than-expected revenue or a recurrence of COVID-19 is also embedded in the negative outlook.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on AMC of the deterioration in credit quality it has triggered, given its exposure to the US and overseas economies, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

STRUCTURAL CONSIDERATIONS

The Caa2 ratings on AMC’s senior secured bank credit facilities and senior secured first-lien notes reflect their diminished expected recovery prospects due to the numerous uncertainties and challenges facing the company as well as their first-out payment position versus other debt holders. The Ca ratings on the New Second-Lien Notes and existing senior subordinated notes reflect their low anticipated recovery prospects given their subordinated position relative to a sizeable amount of first-lien debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating outlook could be revised to stable if AMC reopens the majority of its theatres in August as currently planned, attendance revives to profitable levels and AMC returns to positive operating cash flow.

A ratings upgrade is unlikely over the near-term given the expectation for weak operating performance and challenged debt protection measures. Over time, an upgrade could occur if the company experiences positive growth in box office attendance, stable-to-improving market share, higher EBITDA and margins, enhanced liquidity, and exhibits prudent financial policies that translate into an improved credit profile. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA is sustained below 8x (Moody’s adjusted) and free cash flow as a percentage of total debt improves to the -1% to +1% range (Moody’s adjusted).

The ratings could be downgraded if Moody’s expects: (i) AMC will pursue a second distressed debt exchange; or (ii) a high likelihood of a balance sheet restructuring or bankruptcy filing.

Headquartered in Leawood, Kansas, AMC Entertainment Holdings, Inc. is the largest movie exhibitor in the US and globally, operating 996 movie theatres with 10,973 screens in 15 countries across the US, Europe and the Middle East. The company is 50% owned by Dalian Wanda Group Co., Ltd. (Wanda). Revenue totaled approximately $5.2 billion for the twelve months ended 31 March 2020.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] AMC’s Form 8-K filing dated 31 July 2020 (from EDGAR)

[2] AMC’s Form 8-K filing dated 3 June 2020 (from EDGAR)

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory A. Fraser, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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