It also created the first ever structure that combines a convertible security with a drop-down transaction, according to sources. What’s more, a particularly unique factor — in part a function of the negotiation being driven by holders of second lien debt — is that it gave senior lenders who would otherwise get primed (if they didn’t participate) an option to come in and prime the convertible debt issued to the architects of the deal.

The second lien group was advised by Wachtel and Perella Weinberg, while the term loan group was advised by Gibson Dunn and PJT Partners, as 9fin has reported.

According to sources, the 2L group — holding north of $500m, or two-thirds of the early Covid-era 10% second lien notes remaining that had been issued in 2020 — had been restricted for months.

It has taken extensive planning, according to sources, to create a structure to take advantage of a unique covenant in the 2L document that protected against the creation or capitalization of unrestricted subsidiaries, to then capitalize on the potential upside with a convertible note.

There was no such covenant in the term loans or the first lien notes — and thus the 2Ls became the document that was the only thing holding the company back from creating an unrestricted subsidiary and then utilizing the billions of dollars in baskets to do a drop-down financing.

Something for everyone

While the first lien group had approached the company, which was advised by Moelis and Weil Gotshal, with transactions that didn’t fully deal with the second-lien debt, the 2L group devised a deal that would potentially satisfy everyone, including AMC management and shareholders.

The result was a drop-down transaction that moves 175 theaters and the AMC brand into an unrestricted subsidiary, Muvico. These assets are worth about $1.9bn with $200m of credit support from Odeon, which houses AMC’s international business.

That unsub could then issue up to $2bn in new term loans and up to $464m of convertible debt. The end result will be Muvico issues about $1.9bn total of new term loans including $100m worth of the new term loan that, along with $414m of converts already issued, accounts for taking out the full $514m of second liens held by the second lien group at par, according to sources. The new term loan and exchangeable notes have priority over any holdout debt at AMC Remainco with respect to the collateral in Muvico.

The convertible notes contain several attractive features, including a 13% upstrike over the $5 closing price on 19 July, resulting in a $5.66 exchange price, and an 18-point make whole at convertible holders’ discretion. Those notes issued by Muvico — 6%/8% cash/PIK exchangeable notes due 2030 (see indenture here) — traded at 127 on Friday, according to TRACE data. The SOFR+7% new term loan debt (see credit agreement here) meanwhile has traded just under par already since the initial issuance last week as well, according to sources.

What’s more, the unsub will be able to build cash — one of the factors of the deal is that the Remainco is only able to hold $250m in cash; any amounts above that will be sent to Muvico, which would be part of the unsub, according to a source familiar with the credit documents.

With all these goodies baked in for the new convertibles — most of which were issued to the 2L group in exchange for their second liens — the key to getting term loan holders on board was to offer them a chance to participate in a new term loan that would come ahead of the exchangeable debt at Muvico in terms of payment priority.

So by choosing to participate, term loan lenders are guaranteeing they’re ahead of the new converts with respect to the new assets, they’re not taking any haircut on their holdings, and they negotiated for much stronger documents, sources said.

Ultimately, the deal launched with holders of more than 50% ($1.1bn) of the original $1.9bn term loan on board, after Gibson and PJT did some wrangling. Now nearly all of the remaining holders have agreed to participate.

Some holders of the 7.5% first lien notes took issue with being left behind — but many were crossholders who agreed to participate including Canso Investment Counsel, who were among the largest holders of 7.5% notes, according to sources.

The company, creditors and their advisors were not immediately available for comment.

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