This week’s bizarre “meme stock” rally, which brought windfall gains to holders of GameStop shares, also wiped out $ 600 million in debt from the AMC theater chain.
Indeed, on Wednesday, a private equity firm named Silver Lake – and private equity firms are generally seen as the “bad guys” in this snobbish versus slob drama – chose to convert the corporate bonds it held. in AMC Entertainment Holdings shares. Although the theater chain’s stock price has fallen and skyrocketed since the move, debt relief is permanent.
Last Monday, AMC warned investors that “there is substantial doubt about our ability to continue to operate.” The reason is obvious: The COVID-19 pandemic has ravaged the movie theater industry, and the U.S. government’s broader stimulus, payroll and recovery measures have done little to support it.
Forgetting more than half a billion dollars in debt, however, should ease a lot of pressure on AMC in the near term. “A week ago it wasn’t crazy to think this company was doomed,” Bloomberg’s Matt Levine wrote Thursday. “Now it’s entirely possible that he will survive and thrive and show movies in theaters for decades to come because everyone has gone mad and bought stocks of meme this week.”
As of this weekend, AMC was third on a list of the most sold short US stocks; The editors of the r / WallStreetBets subdirectory, and elsewhere, have piled on these short stocks because, essentially, institutional investors are betting that companies will fail and their stock prices will go down. Collective action by Reddit day-traders (“retail investors,” as the industry calls them) drove some stock prices higher, with the GameStop front page rally leading the charge.
Yet by converting its AMC debt into AMC shares, investment firm Silver Lake also suffered from the decline in stock prices. The conversion price of the bonds held by Silver Lake was $ 13.51; Silver Lake cashed in on Wednesday, when AMC shares ended the day at $ 19.90, over 400% better than the previous day. Smart movement, right?
Well, AMC’s share price at the time of publication on Friday was around $ 15 – but it closed at $ 8.63 on Thursday. So unless Silver Lake finds another sucker to buy the stock before it hits bottom, they’ve been on a roller coaster ride which at best has them about 5% to 7% ahead of the game. their original position, without any guarantee of remaining there.
“I don’t really know what those convertible owners were thinking, but there you go,” Levine wrote. “Maybe they were thinking, ‘Wow, the Redditors really want to buy this stock, we better buy some to sell them.’”
GameStop’s share price was $ 19.95 on January 12 when investors concerned about Reddit’s disruption made their choice. It closed at $ 193.60 on Thursday after eclipsing $ 400 that morning, the first major drop for the stock since the food frenzy began. GME, at time of publication, is still $ 348.
The company released its first public comments on Thursday since its stock became headline news around the world. GameStop’s statement, however, concerned the score of 100 it received from the Human Rights Campaign for its equality practices in the LGBTQ workplace. The company has avoided talking entirely about its stocks, even though its market cap is (on paper, of course) now at $ 24.2 billion.
Analysts speculate that the hype for GameStop, AMC and other stocks will subside as short sellers give up, are no longer forced to buy the stock to cover their losses, or as U.S. regulators eventually step in. The Biden administration said Wednesday that Treasury Secretary Janet Yellen and her economic advisers were monitoring the situation.
The Robinhood mobile trading app on Thursday suspended or restricted trading in GameStop, AMC and other stocks in response to the mania, a move that has drawn condemnation from lawmakers as disparate as Representative Alexandria Ocasio-Cortez ( D-NY) and Senator Ted Cruz (R-Texas).