The Reddit army of day traders has handed gains worth hundreds of millions of dollars to two big-name creditors of struggling cinema operator AMC Entertainment, after the investment firms swapped risky debt for equity that has skyrocketed in value.
The stock price of AMC, the world’s largest cinema operator, soared 300 per cent to $19.90 on Wednesday, as individual investors drove up the price of the stock. That exceeded the trigger price on $600m of convertible bonds held by Silver Lake Group. The firm has now swapped the debt — which paid interest of 2.95 per cent — into AMC stock at a price of $13.51, according to regulatory filings.
At Wednesday’s closing value, Silver Lake’s stock holding was already worth more than $880m. “Silver Lake has made the trade of a lifetime thanks to the basement bandits,” said one credit hedge fund manager.
Earlier this month, Mudrick Capital Management also swapped AMC debt for equity. The investment firm exchanged $100m in debt for close to 14m shares, which are now worth $273m.
In addition, Mudrick lent the cinema operator a further $100m at an annual interest rate of 15 per cent. As a fee for committing to the deal in December, it also received another 8m shares, which are now worth $164m. The investor was already one of AMC’s largest shareholders.
Frenzied trading in AMC, GameStop and other shares over recent days has been sparked by individual investors corralling together through social media networks such as Reddit. The windfall profits for AMC’s backers stand in contrast to some of the anti-establishment messaging from the day traders, who have forced hedge funds to back away from their bets against struggling companies.
AMC renegotiated its convertible bond with Silver Lake last year, increasing the firm’s seniority in the company’s capital structure. The trigger prices for converting the debt to equity dropped in September, after a continued slump in the company's shares.
Cinema operators have been laid low by the pandemic crisis, with lockdowns forcing them to close screens, while the accelerated uptake of streaming services has pushed many studios to release blockbusters straight to on-demand platforms.
AMC indicated how close it had come to collapse earlier this week when its chief executive, Adam Aron, hailed the nearly $1bn raised in debt and equity over the past month as taking bankruptcy “off the table”. The company now had enough cash to survive until July, at current attendance levels, it said.
As part of its fundraising, AMC finished issuing a further $304m of equity on Wednesday at a price of $4.80 a share.
The Kansas-based group operates more than 1,000 cinemas including the UK’s Odeon chain. It was acquired by China’s Dalian Wanda group in 2012 for $2.6bn.
Following the rapid move higher in the stock prices of companies targeted by Reddit users, speculation has also increased over what the companies will do next.
Jason Mudrick, founder of Mudrick Capital Management, told Bloomberg News that AMC should use the rally to issue even more shares and repay debt investors.
Silver Lake declined to comment. AMC and Mudrick did not immediately respond to a request for comment.