Temporal Seniority: AMC's LME and the Value of Non-Participation

Back in March of 2024, as spreads began to compress in on themselves and the much anticipated Fed cut cycle came closer into view, I ranted about the ill-conceived narrative bandied about by some that this macro recipe would result in much lighter restructuring activity through the remainder of 2024 (e.g., that the doldrums of 2021 would return).

Instead, I argued that what we would see is a continued bifurcation within HY credit in which the universe of “distressed debt” – determined as it is through an arbitrary level of spread – would shrink. However, no matter how much spreads compressed in or how much rates declined (within reason) we’d be left with a non-trivial universe of companies that were destined to restructure sooner rather than later unless there was a remarkable turnaround in their fundamentals.

In other words, tighter spreads and lower rates wouldn’t obviate the need for these companies to undertake a transaction but would, at the margins, simply inform their terms and overall structure (e.g., how much discount capture would be achieved, the receptiveness of lenders toward providing new-money as part of a transaction and the terms that’d be on offer, which out-of-court options would be viable to begin with, etc.).

So, if the distressed universe “shrank” by 30% that wouldn’t mean the number of restructuring candidates would shrink by 30%, or that the number of transactions we’d see would be 30% lower, but rather would mean that the number of restructuring candidates as a percentage of the distressed universe would increase (and, sure, some on the cusp that looked like they’d need to do something would be able to leverage the froth in credit markets to finagle a regular-way refi).

With all that said, there’s no getting around the fact that credit markets are far tighter than anyone anticipated they’d become right now. As of this writing, HY spreads are around their seventeen year tights (T+260bps) which is only 19bps off their all-time tights and perhaps more notably the much-discussed “distressed universe” (that can be defined a bunch of different ways, but we’ll define here as the percentage of distressed debt within the Morningstar HY Bond Index) is down to 3.99% (the first time it’s ever cracked below 4%).

Which, in more practical parlance, has meant that anyone with maturities in 2025-26 that could do a regular-way refi (read: that didn’t have a capital structure that all agreed was somewhat untenable) have more or less been able to do so. So, for example, a few weeks ago (Dec. 2) we had $108.5b of loans launched (91% repricings or refinancings) which was the busiest week in history.

Likewise, the week after (Dec. 9) was the second busiest week in history with $74.7b of loans launched across 60 deals – the majority being repricings where stable, familiar companies took advantage of the hot credit markets to cut down interest expense (right now a touch under 70% of all levered loans are bid over par).

However, what should be clear from the above is that even though the M&A and LBO engines are beginning to rumble, with $35b of deals announced on Dec 9 alone, through 2024 activity on both the loan and bond side was dominated by repricings and refinancings. Those that were on the sidelines – patiently, and for some nervously, waiting for either front end rates to come down or spreads to compress in – breathed a sigh of relief and took action (e.g., around 80% of junk bond sales in the US in 2024 refi’ed either pre-existing bonds or loans – the highest percentage since 2010).

But, again, it’s all about the bifurcation, and we still see CCCs on a different track than the rest of the HY market with lots of names that have been, and will be, precluded from doing a regular-way refi...

To this end, what we saw through 2024, even as the distressed universe began to shrivel, was a steady churn of LMEs – an acronym I’ll use here as a catchall despite my known issues with how some use it – with over 40 done of all shapes and sizes (e.g., Alvaria, AMC, Del Monte, Magenta, WideOpenWest, STG Logistics, OnTrac, United Site Services, etc.). In fact, depending on how you want to slice restructuring activity (e.g., if we’re only looking at names with north of $250mm of total debt outstanding) around half of all transactions in 2024 were LMEs of one kind or another.

Thus, even though we’ve had HY spreads compress in and remain static around all-time tights, for those dregs of distressed we’ve seen remarkable single name volatility around earning releases with an almost Pavlovian response having developed in the market: if poor earnings, then an LME is liable to occur and, if we don’t think we’ll be in the ad hoc group, sell.

In other words, folks are beginning to internalize that LMEs will become an even more typical action taken before filing – which, to be fair, isn’t much different than it’s always been (for most large names out-of-court options have always been explored, even if not effectuated, before filing occurs).

Rather, what’s different compared to five years ago is that there are more of what lawyers like to call “technologies” available for a struggling company (e.g., the only out-of-court option isn’t just a classic exchange done at a discount and/or with PIK built-in as there’s now also drop-downs; uptiers, albeit the Fifth Circuit has just complicated the non-pro rata variation a bit but, as usual, people have overreacted and misunderstood the decision’s practical ramifications and what the market response will be; double-dips; or some combination of these should the docs allow).

In other words, since the “art of the possible” has expanded due to the number of creative (read: aggressive) transaction types that can occur pre-filing, this has meant that companies that otherwise would’ve had to file because no viable (read: sensical) out-of-court alternatives existed can now roll the dice and extend out their optionality a bit more.

Further, those within the capital structures of struggling companies, or on the outside looking in, are now much more comfortable placing new-money (even if it’s a coinflip, or worse, vis-à-vis if the company will be able to turn things around). Because, of course, one of the tell-tale attributes of LMEs, despite the divergence that exists between them, is that if new-money is placed it should be pretty well covered (by dint of being at the top of the pre-existing cap structure, being at an UnSub with first dibs on some collateral, being the beneficiary of multiple allowable claims, etc.).

But as everyone has become more comfortable with LMEs (read: LME participants no longer being a who’s who of aggressive credit funds) and as LMEs have become more normalized, they’ve also become tamer – with higher levels of participation by design and less value shift between participants and non-participants (if there are non-participants in meaningful size to begin with).

This trend toward tamer LMEs – as we’ve talked about earlier vis-à-vis the three-stage evolution of LMEs – has been partly to avoid litigation (although the recent trend of LMEs not giving rise to litigation has been broken over the last few months with complaints filed in relation to the Del Monte and AMC LMEs) and partly because companies have pushed for more comprehensive pro-rata solutions which has all had the consequence of recent LMEs being more, for lack of a better word, earnest.

Because while it’s always been a step too far to say that the more notable LMEs of ole (e.g., Serta, Incora, the first Robertshaw uptier, etc.) were done with an eye solely toward IRR-maximization through position enhancement – with no concern to if they really moved the needle on the applicable company’s actual future prospects – it was also true that in the moment after each of those transactions occurred the return profile for participants looked pretty favorable no matter if the company turned things around or filed in short order due to the amount of value shifted at time zero.

Whereas for most of the LMEs done in 2024 – with their much wider participation and less aggressive economics – the natural consequence of less value shifting toward a larger number of participants at time zero is that the best case scenario for participants is often that the company can turn things around and refi the debt when it comes due.

Since, look, it’s nice to participate in an LME and finagle a superior position in the capital structure for oneself – but if everyone, or almost everyone, can participate on somewhat similar terms and the LME involves all tranches of the capital structure then there’s a bit of a rearrangement of the deck chairs going on and thus recoveries won’t be much different if we assume there’s no real turnaround.

Well, at least in some directional sense since, sure, even under a pro-rata structure that achieves full participation AHG members can siphon off non-trivial value through more favorable exchange rates and thus increase their recoveries should filing occur; even if a deal was open to all to participate in, if there were non-participants then they’ll be left subordinated (one way or another) in the structure and that’ll benefit participants and nudge up their recoveries should filing occur; etc.

However, caveats aside, the general point here should be pretty obvious: the mere fact that one participates in an LME doesn’t mean that one’s return profile will magically be positive should filing occur if it wasn’t before – that was true in the ole days of, like, 24-48 months ago because of the limited participation and the significant value shift that occurred at time zero but not so much with these more egalitarian LMEs with their wider participation and diminished value shift. Here’s a nice illustration from Reorg that shows the lesser value shift trend vis-à-vis non-pro rata uptiers (which, as I’ll discuss another time, is not some transaction type relegated to the dust bin of history due to the Fifth Circuit’s decision – in fact, one was rejiggered and completed shortly after the decision...).

So, this is what I meant when I said that recent LMEs have been a bit more earnest because if the company continues to degrade after the LME then participants will not be nonplused (they didn’t shift enough value to themselves through the LME to earn the right to be nonplused!). Instead, if a turnaround doesn’t materialize and a manageable roadblock emerges the incentive of the company and participants will often be aligned to come up with another solution that buys a bit more time.

Or, in other words, if you didn’t like the look of your return profile should filing occur and then you participated in an LME that didn’t involve much value shift to you at time zero and then the company still doesn’t turn things around then you probably still won’t like the look of your return profile should filing occur. So, when the company comes back to you looking for additional, to use a euphemism, accommodation you’ll be receptive if there’s a somewhat viable option since you don’t want them filing any more than they do.

Anyway, the level of participation in some recent transactions like STG Logistics, WideOpenWest, etc. has been so fulsome that the real value shift (in overall dollar terms) that’s occurring is not between participants and non-participants, but between Ad Hoc Group members and non-AHG members who are still participating but on somewhat (or more than somewhat) worse terms.

And this fact, which all of this preamble has been meant to steer us toward, has led to more than a few situations this year where non-participants in an LME (who either proactively decided not to participate or weren’t offered the opportunity to) could, in the end, achieve the highest IRR of all (or at least a positive one, which is still a notable departure from the past!). Because, sure, non-participants in an LME will often be left with paper that’s been stripped (if most in their tranche are participants and can amend the docs) and with a subordinated position in the capital structure that’ll put them in a position to receive nada (or near nada) if filing occurs.

However, if a tranche that’s involved in an LME represents the most near-dated debt, then non-participants that hold that debt will be left with the inside maturity in the cap structure since participants will exchange their holdings into longer-dated paper to push out maturity walls.

Of course, participants aren’t blind to all this, so the new (exchanged) debt will often have a springer if $[xx]mm of the left-behind debt held by non-participants remains outstanding prior to its maturity. But if there’s a somewhat small stub of near-dated debt left and in the future the company is on a more stable footing and has the ability to take it out or other lenders don’t want the company to file because of this small stub – perhaps because the company is a cash incinerator and lenders don’t want to take the keys right now – then the incentive structure of the company and their largest lenders is to figure out a way to take out this stub at par (or at least make a nice offer of some kind) if by doing so it unlocks a few more years of breathing room for a turnaround to occur (this is partially the rationale behind Trinseo’s latest LME that cleaned up the 2025 SNs left behind after their 2023 LME…).

So, as LMEs have become softer, with participation much broader, it can sometimes pay to be a non-participant – although the payoff structure for a non-participant will often become much more binary since if the LME doesn’t work, as most do not, and the company files before the non-participant’s debt matures then they’ll reap the consequences of non-participation (since, of course, the temporal seniority that was to their benefit pre-filing doesn’t matter post-filing).

In other words, the calculus needs to be that by the time the non-participant’s debt comes due the company will have sufficient liquidity to deal with it or there’ll at least be continued hope that a brighter future is around the corner such that they’ll find a way to deal with it (perhaps by cajoling lenders that participated in the original LME to help out one more time…).

These last four years have been marked by consistent concerns about structural and lien subordination as LMEs have become en vogue, but there have been a number of situations as of late that should serve as a reminder that temporal seniority has always mattered and will matter even more as participation rates in LMEs remain high and, as a consequence, little bits of near-dated debt sometimes arise that’ll need to be dealt with down the road.

To this end, in 2024 the most notable illustration of this kind of situation (albeit it involved those that weren’t offered the chance to participate, not those that proactively decided not to) was AMC which completed a hodgepodge LME that involved a supermajority of 2L Noteholders – advised by PWP, AMC was advised by Moelis and a TL group by PJT – coming up with a somewhat novel solution where they agreed to be primed again by those that were senior to them in the pre-existing capital structure.

Note: After some back-and-forth it became obvious to AMC that a drop-down would need to be a component of whatever the final transaction was in order to achieve their primary objective: the pushing out of most of their near dated maturities since they had a huge slug of debt between their TL and 2L Notes due in 2026. However, due to doc constraints on the designation of unrestricted subs in the 2L doc – which didn’t exist in the TL or 1L Notes docs – it became a prerequisite that the 2Ls lead (or at least be satisfied with) any potential drop-down solution since it’d require an amendment of their docs in order to complete it. In other words, the 2Ls were the binding constraint and that provided some obvious leverage in the negotiations if AMC wanted to do a drop-down.

So, to make a long story exceptionally short, before the transaction there was around $1.9b of the TL and $778mm of the 2L Notes outstanding (both due in 2026). Then the transaction was more or less a three part play...

First, the aforementioned supermajority of 2L Noteholders, who held around $518mm of the 2Ls, stripped the 2L indenture to the bone to set the stage for the drop-down to occur. Second, around $1.9b worth of IP and a selection of AMC’s best performing theaters were dropped from AMC Entertainment Holdings to a new UnSub called Muvico that, since it was outside the restricted group, was free to raise as much debt as folks wanted to hold. Third, in the end, almost all the RemainCo TL exchanged into an equivalent amount of a new TL at Muvico and the participating 2Ls exchanged $104mm of their holdings into an equivalent amount of the new TL. Then $414mm of new 2L (Exchangeable) Notes were issued at Muvico with the proceeds used to repurchase an equivalent amount of the (RemainCo) 2L Notes held by the participating 2Ls (remember participants held around $518mm of the 2Ls). Finally, this new debt housed at Muvico was guaranteed by RemainCo (AMC Entertainment Holdings) which still had significant assets (albeit its “best” assets were stripped from it).

Note: To be clear, the pre-existing TL holders exchanged into a TL at Muvico that still has priority over the new 2L (Exchangeable) Notes on the UnSub assets, did not take a discount on the exchange, and now have much tighter docs (an important form of indirect consideration, as I often harp on). So, it was a pretty easy deal to sign onto and in the end, after a follow-on transaction, almost all TL holders participated (there was a small slug left behind that’s been cleaned up since).

For a somewhat fuller treatment, from one side of the ledger, you can read the complaint from an ad hoc group of 1L Noteholders due 2029 that weren’t involved in the transaction (since they have a longer dated maturity) and who have now begun litigation over it on intercreditor agreement violation grounds. (Transaction overview begins on page 11 but be mindful that it talks about the transaction in terms of when it was announced and ignores the follow-on transactions that have increased the size of the Muvico TL like the $762mm near immediate follow-on and a series of much smaller actions that contributed to the RemainCo TL now being extinguished.)

Note: AMC’s view was that these 2029s could wait to be addressed some other time – which shouldn’t come as a surprise since AMC has operated very much under a one-step-at-a-time philosophy (e.g., deal with what’s in front of their nose right now and worry about what’s in the distance when it comes closer into view). And through all of the shenanigans AMC has pulled off to keep afloat over the last four years it’s hard to say that’s been a wrong philosophy to operate under.

Note: The aggrieved Noteholders include Anchorage. Overall I think it’s a pretty weak hand to play but, of course, I think that about most LME complaints. However, the fact that the new 2L (Exchangeable) Notes are secured on a first-lien basis at RemainCo (subject to a cap and a turnover provision to the benefit of the new 2029 TL) is tough to swallow for the pre-existing 1L Noteholders. Or, as the complaint says, “By purporting to give the Favored Junior Creditors [the participating 2Ls], who were formerly junior to Plaintiffs [the 1L Notes], the same claim on that collateral as Plaintiffs, the Transaction eliminated Plaintiff’s lien priority on the collateral that was left. In other words, Plaintiffs’ claims on the AMC remaining [RemainCo] collateral were diluted...”

Note: If curious, the TL group was led by Oaktree, Marathon, HBK, H2, Hudson Bay, Diameter, Sixth Street, Citadel, and King Street, while the 2L group was led by Mudrick (had a nice return through 2024 playing the LME slot machine - easier way to make a living than squabbling with Party City in-court), Discovery, and Pentwater.

While the complaint (and response) dive a bit more into the transaction details, so I won’t regurgitate them here, below is a little illustration (albeit it omits lower swaths of the capital structure).

Note: In case you want to follow the litigation – which has moved, and will continue to move, at a glacial pace – then go here and search index number 654878/2024 (not much action beyond some preliminary barbs back and forth).

It’d take a bit longer to do full justice to what AMC has done through 2024 since AMC’s actions are better understood as a conveyer belt of transactions – this large one and then a series of smaller ones – that have steadily chipped away at its near dated maturities (see: the recent collection of little follow-on actions taken in Q3 and Q4 after the LME to clean up some remaining near dated debt).

But the point of all of this preamble is that one would expect that if we were to look at how RemainCo’s debt has traded in the aftermath of this LME it wouldn’t be pretty. However, the left-behind 2Ls are the most significant of all of AMC’s inside maturities and since the transaction resulted in AMC’s runway being significantly extended the market view is that AMC – which has been so resilient in the face of what have looked like disastrous prospects for years now – isn’t going to let a pretty small slug of left-behind 2L Notes be the reason for filing in 2026 after all it’s been through.

In other words, even though these left-behind 2L Notes have had their docs stripped and are now structurally subordinate to the best of AMC’s assets – and are also subordinated within the RemainCo structure – the prevailing view is that since 2026 is around the corner and AMC has a pretty robust liquidity position and the majority of their debt has been pushed back to 2029 then no matter what AMC’s fundamentals look like (within reason) in 2025-26 they’ll figure out a way to take out these 2Ls (whether at par or through an exchange on favorable terms).

Given this, since the transaction occurred the left-behind 2Ls have risen to par and have consistently traded with a yield (7-10% over the last month) that’s even tighter than the 1L Notes (10-12% over the last month) above them at RemainCo (remember the 1Ls are due in 2029 – so this partially signals that while there’s confidence the somewhat small slug of left-behind 2L debt in 2026 can be addressed, 2029 is much further in the future and the prospect of AMC being able to address the 1Ls, which are also a much more significant slug, is a bit more uncertain).

Below was AMC’s cap structure after its core transactions were completed (as mentioned, through Q3 and Q4 near dated maturities, including $127mm of the 2Ls, were cleaned up a bit, and the small slug of the 2026 TL is now extinguished). However, what’s important to note here is how bizarre it seems that in the aftermath of the drop-down the 1Ls at RemainCo have traded wider than the 2Ls (both have seen significant price improvement since the LME, but the 2Ls have consistently traded tighter). But that’s because temporal seniority still matters – until, upon filing, it suddenly doesn’t.

Note: Lots of caveats to the above (e.g., the new 2L (Exchangeable) Notes are exchangeable at an exchange price of $5.66 with a mandatory redemption at par if 90 days prior to the maturity of the pre-existing 1L Notes at least $190mm are still outstanding, Muvico benefits from $200mm of credit support from Odeon that’s effectively subordinated to the Odeon SSNs vis-à-vis an intercompany loan from Muvico to Odeon secured by a pledge of Odeon equity, AMC a.k.a. RemainCo can’t hold more than $250mm of cash and must sweep the excess to Muvico and likewise Odeon can’t hold more than $150mm, etc.). Once again, in Note 6 of AMC’s Q3 10Q you’ll see that things have been cleaned up a bit from the above vis-à-vis near-dated maturities – with a bit more cleanup having been completed since that 10Q came out.

Also, look, it’s not that a transaction happening to work out (at least for now) to your benefit nullifies any argument you have against it, but when you’re litigating over a transaction that has stripped you of some of your “rightful” collateral and then the debt that’s the victim of all this stripping trades from the 60s to 90s in the months to follow, I don’t know, it doesn’t make the optics fantastic...

Note: While some of the 1L Notes are aggrieved over the transaction, etc. remember that in any large capital structure large holders in one tranche are often liable to be large holders in other tranches too. So, there were a non-trivial number of those that held the 1L Notes that did participate (with their holdings in the TL and/or 2Ls) in the transaction and who, by extension, are more than happy with the outcome on all fronts (since the entire capital structure, no matter where you are, has traded up!).

Note: When I say that temporal seniority matters (pre-filing) until it suddenly doesn’t (post-filing) that’s in reference to acceleration of debt upon filing: language in docs which stipulates that, upon an event of default, the debt will be deemed due and payable then (e.g., see the RemainCo 2L Notes language below). In other words, for practical purposes upon filing all the company's debt, regardless of its pre-filing maturity date, becomes squashed together from a maturity perspective and thus temporal seniority evaporates. Which, of course, you already intuitively know since in our little waterfall interview questions we care about structural and lien seniority to figure out who gets what recovery, but not what the pre-filing maturities of all the debt in the capital structure happened to be...