AMCX - AMC Networks: 9.5% Yield Opportunity On Short-Term Debt

2023-09-25 02:43:37 ET

Summary

• AMC Networks' debt offers higher yields than corporate benchmarks, making it an attractive option for income investors.
• The company has faced headwinds affecting profitability, particularly in advertising and international performance.
• AMCX's balance sheet has shown improvement, with shareholder equity growing and a significant reduction in current liabilities.

AMC Networks ( AMCX ) is a entertainment company that specializes in original films and television series along with a streaming division. The company's debt has been in my portfolio for some time and continues to trade at higher yields than its corporate benchmarks. While the longest duration debt is yielding over 15%, I believe the 2025 maturing bonds and their 9.5% yield are the best place for income investors.

AMC Networks has seen some headwinds affecting profitability in 2023. During the first half of the year, revenue declined by approximately 4% or $54 million compared to a year ago. Fortunately, the company was been able to mitigate the declines by making cost improvements in SG&A expenses. Ultimately, operating income was still $48 million lower than a year ago driven by higher depreciation and amortization. The headwinds in AMC Networks revenue seem to be centered around advertising and its international performance.

AMC Network's balance sheet showed improving strength in 2023. In the first six months of the year, shareholder equity grew by nearly $190 million from $853 million to over $1 billion. The primary driver behind this increase was the reduction of current liabilities (excluding debt) by more than $200 million. While long term debt is lower, interest bearing debt remains the same as more than $400 million of debt has become due over the next 12 months. The company's $900 million in cash on hand should also be reassuring to debt investors.

As an investor in the company's debt, I am most encouraged by the company's cash flow performance. In the first half of 2023, AMC Networks generated $8 million more in cash flow from operations than in the same period a year ago. While this amount may seem modest, it came after a $163 million reduction in accounts payable. AMC Networks has been able to pay down vendor debt while generating free cash flow in 2023.

AMC Networks has $400 million in 2024 notes coming due in April prior to the 2025 notes maturing the following August. While this near-term debt wall may have investors concerned, this is where the company's $900 million cash balance comes into play. There is clearly enough cash on hand to pay the 2024 notes off when they mature. As for the 2025 notes, the company has an untapped $400 million credit facility that brings total liquidity to nearly $1.3 billion, above the 2024 and 2025 maturity obligations.

AMC Network's management has indicated their confidence in meeting these short-term funding needs in their latest 10-Q filing. The company also has no reason to believe that it cannot tap into the capital markets for a new note issuance that accounts for a partial funding of the maturities. A new note issuance would likely carry an interest rate of around 8% and likely be of short duration, maturing before the 2029 notes, which creates additional uncertainty and makes the 15% yielding 2029 notes too risky for me.

In addition to the possible refinancing, the writers and actors strike creates a fog of uncertainty as to how it will impact AMC Networks over the long-term. In its second quarter earnings call, management noted that their pipeline of completed shows will last them well into 2024, another reason why I am confident in the company's shorter-term debt obligations.

One additional consideration for investors is the $624 million term loan facility. This represents a senior class of creditors that could potentially be disruptive to the refinancing process if they believe that the capital leaving the organization to pay off unsecured creditors is detrimental to their position. Currently, there is no indication of this occurring, but that may not stop them from weighing in on how to handle the upcoming debt maturities.

Overall, I'm comfortable with receiving a 9.5% return on my debt investment over the next two years and then re-assessing the company based on its actions. The combination of cash on hand and revolving credit capacity gives AMC Networks the liquidity to address its upcoming bond maturities, not to mention any potential new debt issuance.

For further details see: