The cost to borrow (CTB) fee for AMC Entertainment (NYSE:AMC) has skyrocketed to 215.80% today, up by more than 100% from the reading of 101.76% on March 10. Yesterday’s closing CTB fee reading clocked in at 211.41%. Meanwhile, between March 10 and today, AMC stock has fallen more than 10%. What’s going on?
The CTB represents the yearly fee that short sellers must pay to borrow shares. A higher fee could represent increased short seller demand while a lower fee could represent lower demand. A higher fee could also signal a scarcity of available short shares. Still, AMC’s exorbitant CTB fee could actually be seen as a positive for AMC stock shareholders.
No short seller wants to pay 211.41% interest on borrowed shares. As a result, a high CTB could influence short sellers to sell out of their position in a bid to escape the fee. A higher fee also reduces the chances of a short seller emerging profitable in their trade.
AMC Stock: CTB Fee Accelerates Higher
In general, a CTB fee above 10% is considered high, while a fee above 20% is considered very high. AMC’s fee blows both of these numbers out of the water, which could reflect increased short seller demand.
Last week, AMC announced that shareholders approved proposals to increase authorized shares and to enact a 1-for-10 reverse split. The approval of these two proposals opened up the path to convert all shares of AMC Entertainment Preferred Equity Units (NYSE:APE) into AMC stock. This would spell dilution for existing AMC shareholders, which could lower the stock price. The approvals could have influenced short sellers to step up their game.
Meanwhile, Citi reiterated coverage of the movie theater company this morning with a “sell” rating and a price target of $1.60. Analyst Jason Bazinet believes AMC is relying too much on leverage. In order to deleverage, AMC’s efforts will be “primarily contingent” on either higher movie ticket sales or raising additional equity through equity offerings. Citi expects the U.S. box office to grow by 25% this year.
Bazinet believes that dilution is a major risk as well. The Citi analyst explains:
“If the newly combined share class converges at AMC’s prevailing common equity value, we estimate AMC’s share count would need to increase ~77% to pay off all outstanding debt. If the value is closer to the prevailing APE unit value, AMC would need to increase shares by 230% to pay off its debt.”
The analyst formulated his price target based on a ~7.5x multiple for 2024 adjusted EBITDA.
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On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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