GameStop’s a good short. AMC? Not so much

Energized by an epic win over Wall Street's most feared hedge funds, retail investors are now hunting for the next GameStop Corp. Among the shortlist of names is AMC Entertainment Holdings. But buyers beware: the movie theatre chain has too much debt to make a good short squeeze.

To put the hedge funds in a corner, retail investors need to ensure that there are not too many shares floating around to be borrowed against. But as long as the pandemic continues, both GameStop and AMC have strong incentive to raise money via new equity issues, especially after soaring over 1,600% and 500% respectively in January. That would provide ammunition to the bearish Wall Street pros.

Both companies need cash. In the nine months ending October, GameStop bled about $288 million in operating loss. Meanwhile, in the December quarter, AMC had an average cash burn of about $124 million per month, as theatre attendance in the U.S. fell about 92%.

But the similarity ends there. Hypothetically, even if GameStop decided to issue new shares to pay off its entire $1.2 billion debt pile, there would still be enough short positions left to squeeze. As of January 29, there were still close to 20 million shares of those, data compiled by Markit shows. That's worth about $5 billion.  

The same can't be said of AMC. As of last Friday, about 12% of shares outstanding were in short position, or about $620 million worth. That's nothing compared to the billions of debt AMC has accumulated. During the pandemic, cash-strapped AMC raised about $6.5 billion via expensive junk bond issues. Its latest $100 million bonds, for instance, pays 15% cash coupon — or 17% if it's payment-in-kind.

AMC has been busy scouring for money via all channels. It started an at-the-market equity sales program in September, raising about $870 million by selling 281 million shares since. Why should the company change tack now?
An optimist may argue that after all the capital-raising, AMC's need to tap into the public is now diminished. It holds about $1.4 billion cash, estimates Goldman Sachs Group Inc., a huge improvement from $308 million as of year-end. So with a monthly cash burn of around $124 million — even if we assume the pandemic does not get better and theatre attendance does not improve from 2020 – AMC has enough cash to last through the year. Major bond repayments also do not kick in till 2023.

That outlook, however, is too rosy. AMC is still very much at the whim of its bankers and creditors. For instance, the company's $225 million revolving credit has a stringent leverage covenant that comes into effect when over 35% of the facility is used. Currently, it has already drawn down that facility and breached that covenant. It has managed to obtain a waiver but that will expire in the second quarter. To avoid a default, AMC will need to renegotiate with its bankers again.
 
There's a worse scenario. What if — after raising all that capital — AMC's auditors still question the company's "going concern"? That would trigger a default clause stipulated in its senior debt agreements. AMC will have to re-negotiate with the entire lender group, instead of just the lending banks in the revolver, noted S&P Global Ratings. According to the agency, AMC has about $3.8 billion in senior secured debt claims outstanding. In other words, the cinema chain continues to have a strong incentive to sell shares, if only to swap out some debt.
 
Finally, let's not forget who ultimately owns AMC. Wang Jianlin, who as recently as 2016 was China's richest man, is someone quick to take advantage of shifting market sentiments. Back in May 2016, he took his Hong Kong-listed commercial real estate arm private, in hope of re-listing in the mainland, where valuations are higher. Much to his dismay, his price arbitrage scheme did not work out. Beijing's regulators gave him the snub. That does not mean Wang won't try again in the U.S.  
 
Those playing the GameStop tournament have made waves with tactics like gamma squeezing the brokers. But these are pure market mechanics. It's time to step back and ask about a company's corporate governance. What if every time you push up a stock price, the company starts to sell shares and facilitate the shorts? Some are quite eager to cash out on this stock frenzy.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker at Lehman Brothers in New York. She studied Economics at the University of Chicago and is a CFA charterholder.sa