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The tax benefits of debt are a big deal and explain why companies are so eager to borrow money to fund operations. However, debt comes with costs. The most critical of these is bankruptcy and while the direct or deadweights costs of actually going bankrupt (and ending up in the legal system) are a component, an even more critical component is indirect bankruptcy cost. That is the cost that arises because people perceive that a company is in trouble, because of its debt, and change the way they interact with it. In particular, customers stop buying its products, suppliers demand cash and employees abandon ship. In this puzzle, I focus on AMC, the theater chain company that acquired notoreity as a meme stock, before crashing and burning this year, with its stock price down to an all-time low.
Founded in 1920, AMC is the largest theater chain company in the country, ahead of Regal and Cinemark. While the company has had a long and glorious history, it has to run into trouble in the last decade, with COVID delivering a devastating blow. After a near-death experience in 2020, AMC's stock price has had a rollicking ride, caught up in the meme stock phenomenon to reach a high of $551.38. It's CEO, Adam Aron, has encouraged and partaked in the game, often making corporate decisions to encourage more speculation in the stock. Looking at the company's financials, you can see that the company's revenues peaked in 2018, and have not recovered fully since. After three years of operating losses, the company finally reportd a small operatting profit in 2023.
After the market correction in 2022, the meme stock game has lost its allure, and AMC's stock price stands at $4.50, translating into a market cap of about $550 million. With more than $19 billion in debt outstadning, the company's debt ratio is in exccess of 96%, and it is unsurprisingly facing bankruptcy, with a bond rating of B-. The company has tried to gets its financial house in order, issuing new shares in November 2023 and then carrying out an equity for debt swap in 2024. While those actions provided temporary respite, the company continues to walk of the edge.
Putting AMC's operating numbers into the optimal capital structure spreadsheet, you get the unsurprising result that AMC is hopelessly over levered, with an actual debt ratio of 96.28% and an optimal, on a good day, of about 40%.
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