- AMC Preferred Equity (APE) units are worth about a dollar today.
- Created to serve as a currency to help AMC raise capital and grow, about $37 million worth of APE units have already been sold.
- AMC shareholders and short sellers have been adopting different approaches to maximize value with APE units.
APEs, AMC's Development of the Year
We first heard about AMC Preferred Equity (APE) units during AMC Entertainment's (AMC) - Get Free Report second-quarter earnings call. Management announced that it would issue a dividend in the form of preferred equity.
On August 19, each AMC shareholder received one APE share for each AMC share they owned. On August 22, APEs began to be publicly traded on the NYSE with a share price of $6.95.
At the debut APE's trading volume was massive. Shares were halted by volatility 10 times during the initial trading session.
The APEs were named in honor of AMC's retail shareholders. And their main goal behind the initiative to offer them was to help AMC raise enough capital to pay off its approximately $12 million debt load.
As AMC CEO Adam Aron pointed out, in addition to their debt-relief potential, APEs would be one of the company's most significant developments in 2022. The money they raised would also be useful for M&A (merger and acquisition) funds and would be key to AMC's long-term prospects.
However, for AMC to use the APEs for such purposes, it would require the approval of its shareholders. With one vote, they could approve the conversion of the APE shares to AMC shares. If that conversion doesn't happen and the two shares remain separate, there will be no dilution in AMC's common shares.
As AMC management reported during its third-quarter (Q3) earnings call, the company wrote off about $144 million of its $400 million in loans and raised roughly $37 million in equity from the sale of some of its preferred shares.
Shareholders Have Mixed Feelings About the APEs
Since APEs' public trading began, their share price has plummeted 82% from $6.95 to almost $1 per share today. APE is now a penny stock.
Shareholders, afraid of dilution, had somewhat mixed feelings about the initial proposal of preferred units. They worried that it would result in the issuance of more stock.
And short sellers were aware of this.
On the one hand, APEs put AMC in a more comfortable liquidity situation and thus lowered the risk of bankruptcy. This will help the company raise cash and pay its obligations.
On the other hand, stock offerings are almost always short-term bearish for stocks. While offerings can help the company achieve a more solid financial footing in the long term, pumping more shares into the overall float decreases the value of the existing shares.
However, even with the possibility of future dilution, it's worth noting that an AMC has bucked the typical dilution response in the past. Share issuances in 2021 made little difference in the trajectory of the company's short-term share price.
On the contrary, during periods of heavy stock dilution — January and June 2021 — AMC's share price soared.
Even so, depending on the strategy, selling APEs could make sense so that shareholders can focus on a single equity: AMC common shares.
Other APE Trading Strategies
AMC shareholders and short sellers have been exploring some trading strategies regarding APEs.
On the long side, shareholders are raising the possibility of a reverse split of the APE shares. This would add value to the common AMC stock. During the last earnings call, CEO Adam Aron was asked by shareholders about this possibility.
"It's something that's legal to do. But interestingly, an action like that would require a shareholder vote, which should remind us all since there are many shareholders on this call. This is your company. Day to day, we run it," Aron said.
On the short side, the latest Morningstar data indicates that 50.67 million APE shares were being shorted through mid-November — an increase of more than 10 million shares compared to the previous month.
This increase in demand for shorting APEs is also reflected in the stock borrowing market. Fees to borrow APEs are currently at all-time highs, averaging a rate of 10% annualized.
However, APEs can also be an arbitrage opportunity. That's what famed short investor Jim Chanos, founder of Kynikos Associates, revealed in late August when he was shorting AMC stock and long APE units.
The definition of arbitrage in investing is to simultaneously buy and sell the same asset in different markets to profit from small differences in the list price of these assets.
"We are still long the spread... It's silly. They are the same piece of paper ultimately," Chanos said.
However, since Chanos' statement regarding his arbitrage trade, APE shares have depreciated about 64%. AMC's stock has risen 4% in the same period – considering AMC's share price on November 30 trading session.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)