AMCX - AMC Networks Short-Dated Bonds: They Are A No Brainer

2023-03-27 06:06:54 ET

Summary

• AMC Networks has two near-dated bonds, maturing in April 2024 and August 2025, respectively.
• To protect the long-term equity value, it's in the best interest of AMCX shareholders to clear out the near-dated maturity wall.
• AMCX has already tried to push out the 2024 and 2025 maturity via a tender offer, which was canceled due to refinancing market conditions.
• AMCX can effectively take out these two bonds with the combination of cash on hand, free cash flow generation, and revolving credit facility capacity.

Situation Overview

In 2024 and 2025, AMC Networks faces a substantial maturity wall with two senior notes due: $400 million 5.0% senior notes in April 2024 and $800 million 4.75% senior notes in August 2024. My belief is that these bonds are money good. It is essential to eliminate these bonds from a shareholder's perspective to safeguard the equity's long-term value. In terms of liquidity, I am confident that AMCX can pay off the bonds using cash reserves, free cash flow, and the available revolving credit facility, which has not been utilized.

AMCX made an attempt to tender for the two bond series but was unable to meet the Financing Condition, leading to the offer's cancellation . Although the macro environment remains challenging for refinancing, I am confident that AMCX can successfully eliminate a maturity runway of $1.2 billion within the next year or so.

Company Description

AMC Networks is a media and entertainment company that operates several popular television channels, including AMC, WE tv, BBC America, IFC, and SundanceTV. These channels are known for their original programming, including hit shows like The Walking Dead, Mad Men, Breaking Bad, and Better Call Saul. In addition to its television networks, AMCX also operates a streaming service called AMC+. This service allows subscribers to watch popular shows and movies from across the AMCX networks, as well as exclusive original content. Overall, AMCX is a leading player in the media and entertainment industry, known for its high-quality programming and innovative approach to content delivery.

Capital Structure

AMCX's capital structure is straightforward. There is a senior secured term loan A of approximately $640 million at the top. The same credit agreement offers an unused revolving credit facility of $500 million that expires in February 2026. Based on the lower end of the EBITDA guidance range of $650 million, AMCX's 1L gross leverage is approximately 1.0x. Additionally, there is around $900 million in cash on hand. In my opinion, AMCX should be able to extend the credit facility comfortably until 2028 (prior to the 2029 senior notes) to allow for some breathing room.

Beneath the senior secured term loan A, there are three series of senior notes maturing in 2024, 2025, and 2029. With a $650 million EBITDA estimate, AMCX's net leverage is approximately 3.0x through the unsecured portion. Additionally, AMCX anticipates generating approximately $200 million in free cash flow for FY2023.

Strategic Transaction

The market is aware of the ongoing decline of linear TV, which directly affects AMCX as one of the few remaining midsized independent cable channel operators. Cord-cutting has had a significant impact, and while streaming was initially considered the future, it has proven challenging to make it profitable for other large streamers. Additionally, AMCX does not have the financial means to become a major player in the industry. As a result, AMCX and other sub-scale media companies will likely need to come together to increase their chances of success.

During the latest earnings call , Interim Chairman James Dolan expressed his willingness to pursue M&A opportunities. Furthermore, at the J.P. Morgan High Yield and Leveraged Finance Conference , the CFO affirmed that merging with Starz has strong industrial logic. Regardless, any strategic transaction would undoubtedly enhance AMCX's financial and competitive position, thereby bolstering its creditworthiness.

Return Potential

The 2024s have a yield of +8%, while the 2025s have a yield of +11.8%. If market volatility persists, and AMCX is unable to secure a senior secured term loan with favorable terms, I anticipate AMCX will utilize its cash on hand to redeem the 2024s when they mature. Additionally, once the term loan market becomes available again, I believe AMCX will take out both the 2024s and 2025s together to extend its maturity runway. In any scenario, investors should expect to earn at least the stated yields from these two bonds, with the potential for even higher yields if AMCX chooses to redeem them earlier.

Conclusion

In this uncertain market environment, the return of capital is more important than return on capital. AMCX is both motivated and capable of managing its near-term maturities. Shareholders are eager to have a clear maturity runway, and AMCX has substantial liquidity to fulfill its $1.2 billion obligation over the next 12-24 months.

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