The impact of the GameStop and AMC drama on the corporate bond market – Yahoo Finance

Chris White, BondCliq CEO joins the Yahoo Finance Live panel with the impact of Gamestop and AMC market volatility on the corporate bond market

Video Transcript

AKIKO FUJITA: The Reddit trade has helped protect the debt positions of a number of cash-strapped companies, including GameStop and AMC. AMC’s bonds were the most actively traded debt from a list of stocks in the Russell 3,000 Index that was caught up in the short squeeze. Let’s bring in Chris White. He’s the CEO of BondCliq. And Chris, while so much of the talk last week was about the surge in GameStop, you say the bond story is really about AMC. What specifically did you see in the corporate bond moves coming on the back of the Reddit trade last week?

CHRIS WHITE: The story is really in the price action that we’re seeing on AMC. The GameStop bonds have really traded around par during most of this time and are coming from a place where they were trading at par. But when you’re looking at AMC going back to October of last year, their five-year bonds or one of their five-year issues was trading at around $7.50. And now that same bond is trading at close to $75. So a 10 times increase in the value of that bond. And that’s definitely due to a lot of the action on Reddit and a couple of other factors.

ZACK GUZMAN: Yeah, what are those other factors too? Because when we talked about bonds earlier in the pandemic, obviously, that market was hit pretty hard with the fears about where this was going to go. But what have you seen in the way that maybe AMC ties back to those bankruptcy fears kind of being reduced through some of the money they were able to raise?

CHRIS WHITE: Well, we always have to remember that bonds sit up higher on the cap structure. So if AMC were to go bankrupt, there are still some assets that could be liquidated and paid back to bondholders. Obviously, if you hold AMC equity, you’re sort of out of luck. You’re probably not going to, AMC will basically go to zero and your stock will be worthless. So it’s a little bit of a different approach in terms of trying to value of the bonds as opposed to the equity.

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But one of the major things that happened with AMC, is they had a private placement deal with a hedge fund called Silver Lake, in which basically they had borrowed $600 million in the form of a convertible note, which would convert into equity or a convertible bond, effectively. I think that going into, before the Reddit rally, I don’t think anyone imagined that the debt would be able to convert into actual equity.

But that actually happened on Wednesday, where 44 million shares were basically issued in exchange for the $600 million in debt. Silver Lake made a nice profit of $281 million. And effectively, you took that debt off of AMC’s books. So that’s one of the things that I think changed the perception of whether AMC can be solvent going forward, which is basically what controls price action in a bond.

AKIKO FUJITA: Chris, the big question, of course, is, how much of this rally that we have attributed to Reddit is here to stay? As it relates to AMC specifically, you’ve said that the debt market is really the one that’s going to be indicating whether the short squeeze rally is over. What’s the number that you’re going to be watching on that front? And what have you seen at least just in the trading day today, trading session today?

CHRIS WHITE: Well, we’re still seeing a lot of activity in AMC. We’re still seeing it move to the higher side where it’s been trading for the past six months. I think a couple of things to look out for, one of the most important things to look out for, is can AMC actually tap the debt markets again for capital. And can they do it at lower interest rates than what they were doing earlier in 2020.

If they can, it actually bodes well for AMC to kind of get through this in a way that someone might get through a troubling personal financial issue, if they could refinance their home and do it at a lower interest rate. So that’s what we’re really looking for in terms of the long-term health of AMC. The difference in the stock and the bond market is when you’re investing in that bond market, you’re taking a long-term, let’s say, five-year view on a company, because just trading in out of the debt can get quite expensive. So it’s not a sort of buy and flip like you might do in the stock market.

ZACK GUZMAN: Yeah, it’s interesting to hear you talk about the nitty gritty of what went behind this move, because we obviously saw hashtag #SaveAMC trending on Twitter when retail investors got attention to this. But we knew that they had kind of addressed that question before it took off, because we had seen the CEO come out and say, look, bankruptcy at least is not going to be on the table for this year.

But how much truth was kind of behind the share pop coming from the retail side with that attention around SaveAMC that allowed them to kind of offer equity side, offer shares to pay down that debt that you’re discussing? I mean, how true is it that retail investors did come in here to play a part in that rebound?

CHRIS WHITE: No question about it. Because when you have convertible bonds, the bonds are pegged to a strike price. So if the stock, just like a call option. So if the bond, if the equity hits a certain level, then converting the bonds actually into equity makes sense. And so when Silver Lake converted, I think they converted at a price of $13.51. The close for that day, this was last Wednesday, was something like, I think it was $19, almost $20. So instantly, there’s a six point profit to the bondholders to convert out of debt into the equity.

To the company though, they don’t have to pay off that debt. They’ve obviously issued more shares in order to handle the convert. And that’s really, really great for their cap table to not have to pay off this high coupon debt and instead, just issue more shares, and then be able to tap the debt markets again potentially at lower interest rates. These are all positives for AMC. So they definitely have the Reddit users to thank for that.

AKIKO FUJITA: And Chris, while I know you’re focused on AMC, of course, a number of other companies that were caught up in the short squeeze, if we’re talking about the impact from the Reddit trade. What are some other names that you’re watching that you think could benefit on the back of this?

CHRIS WHITE: I think that any company that has had issues with having to issue, has had issues with tapping the debt markets, whether it’s getting more and more expensive, where maybe you’re seeing a lot of short interest in the marketplace from an equity standpoint, I think if the Reddit rally starts to hit those companies, it starts to change the conversation around that company’s solvency going forward. The interesting thing about the debt markets is, people aren’t really trading the fundamentals of today as much as they’re trading the fundamentals of tomorrow.

Everything that we’re doing in the debt markets is, we’re trading based on whether or not we believe a company will be able to pay off their debt. Now, not every company is going to have a private placement convertible bond issue like AMC had, and get a windfall from the uptick in their stock. But it is interesting to me that GameStop, their price has really stayed around par throughout this turmoil. It basically tells you that what the bondholders are saying is, regardless of what’s happening in the equity market, we think the probability of GameStop paying off their debt has pretty much remained the same.

ZACK GUZMAN: All right, Chris White, appreciate you coming on here to talk about that. Fascinating to hear you walk through how all these things trade together. Appreciate you taking the time.

CHRIS WHITE: Thanks for having me on and happy new year.