AMC Networks: “Breaking Bad” Bonds

August 20th, 2013 by

Breaking BadIn December 2012 AMC Networks (AMCX) (which spun off from Cablevision Systems (CVC)) issued $600M in new corporate junk bonds due in 2022. The bonds have a 4.75% coupon and are continuously callable beginnning December 2017. Currently the bonds standout for their 5.1% yield.

We intend to use such proceeds to repay the entire outstanding amount under our term loan B facility in an amount equal to approximately $587.6 million, with the remaining proceeds of approximately $0.4 million to be used for general corporate purposes

Moody’s upgraded AMC Networks corporate family rating outlook from stable to positive one week prior to the new bonds being issued, last December. This is noteworthy since many times a credit rating is subject to downgrade, if new debt weighs adversely on a company’s balance sheet.

Take a look at how the newer AMC bonds stack up to NBC Universal bonds issued last October:

 credit rating price yield
Amc Networks Inc Sr Nt 4.75% 2022, Cont Call 12/15/17 @ $102.38 (cusip: 00164VAC7) B1/BB- $96.75 5.19%
Nbcuniversal Media LLC Sr Nt 4.45% 2043, Make Whole Call (cusip: 63946BAJ9) A3/A- $89.27 5.16%
Nbcuniversal Media LLC Sr Nt 2.875% 2023, Make Whole Call (cusip: 63946BAH3) A3/A- $92.89 3.78%

The NBC Universal bonds are rated substantially better, of course NBC was recently bought from GE (GE) by Comcast (CMCSA), and is a larger business than AMC.

Breaking Bad Bonds

Today investors must consider whether AMC Networks will have continued success over the next decade, even whether AMC Networks will remain an independent company. For the moment Breaking Bad is the name of AMC Networks’ game.

BrBa

AMC Networks home page

AMC Networks’ website features a banner promotion at the top for Lustgarten Foundation, the Pancreatic Cancer foundation named for Cablevision executive Marc Lustgarten. Lustgarten Foundation is located at Cablevision’s headquarters in Bethpage, New York.

Few companies have established as important foundations as Lustgarten, which sets Cablevision apart in my opinion. Breaking Bad also serves as a metaphor for the conflict and struggle of cancer patients — the trick for AMC Networks though, is taking on important societal issues while achieving and maintaining profitability.

AMC sold Bravo to NBC in 2002 and has built a few strong television channels that screen older movies and newer films through Sundance and IFC. The company’s annual report states:

… acquired programming includes episodic series such as CSI: Miami , Charmed , Ghost Whisperer , Roseanne, Malcolm in the Middle and Arrested Development , as well as an extensive film library.

 The report explains AMC Networks’ business model as follows:

Our programming networks are distributed to our viewing audience pursuant to affiliation agreements… These agreements, which typically have durations of several years, require us to deliver programming that meets certain standards set forth in the agreement. We earn affiliation fees under these agreements, generally based upon the number of each distributor’s subscribers who receive our programming or, in some cases, based on a fixed contractual monthly fee. Our affiliation agreements also give us the right to sell a specific amount of national advertising time on our programming networks.

Television faces increased competition from online media, though it should be noted very popular programming, such as AMC’s Breaking Bad is available on Amazon Instant Video and Netflix. AMC also shows a few full episodes of its shows on its website AMCtv.com.

AMC Repaying Debt

AMC issued the new debt last December when the 10-year treasury yield was 1.78%, today the 10-year is 2.88%, up 61%! The AMC bonds’ issue price was $100.00 — they have gone for as low as $96.40 recently, their yield has gone up 7.7%.

The price move on the AMC bonds seems to be much less than the dramatic increase in treasury yield over the same period. Remember the AMC bonds are fairly low rated junk bonds, Moody’s outlook from last December stated:

An upgrade of the company’s CFR could occur if management demonstrated and made a commitment to a less volatile and more fiscally conservative capital structure on a sustained basis. The rating could be upgraded if debt-to-EBITDA leverage is sustained at or below 3.5x.

The rating could be downgraded if management applies cash to fund returns to equity investors instead of reducing leverage. In addition, a view that values were materially diminishing for cable networks and/or any potential damage to the AMC brand, in particular, or a more constrained liquidity profile, could also put downward pressure on the company’s ratings.

AMC Networks stock is currently priced at $65.66 between a broad 52-week range of $37.47 and $72.46. The company does not have a dividend and has approximately 72.4M shares outstanding.

Though the low B1 credit rating implies a good deal of risk, AMC Networks may appeal to some investors looking to add higher yield bonds to their portfolios, who may be comfortable with AMC Networks prospects for the next ten years. Obviously the top concern is risk of default. Though the company has found a great deal of success with Breaking Bad (Warren Buffett told media he is a “big fan” of the show, and attended the premiere of the final season) investors must wonder what AMC Networks will do once the show concludes. AMC’s annual report gives some direction:

In December 2012, the network premiered a brand new original co-production Restless , and star Charlotte Rampling was nominated for a 2013 Screen Actors Guild Award. In 2013, Sundance Channel will launch two new original scripted series, Top of the Lake and Rectify . Top of the Lake (from Oscar® winning director Jane Campion) is a miniseries starring Holly Hunter and Elisabeth Moss. Rectify is Sundance Channel’s first wholly owned original scripted series from the producers of AMC’s Breaking Bad.

Investors should be aware popular, successful shows like Breaking Bad are not particularly easy to pull off — the show must pull in viewers from episode number one, and practically raise viewership exponentially for years. Today people are also viewing content on the internet, and YouTube content is far shorter and easier to produce than hour long television shows.

Breaking Bad runs $3M or more per episode, and contracts with show creators can top $25M, furthermore Breaking Bad is produced by Sony, Mad Men is produced by Lionsgate Television. So AMC Networks must duel with both Sony and Dish, for instance adding layers of complication that can interfere with profitability, given only a certain number of programs will ever gain immense popularity.

Walter White Meet Daniel Holden

Let’s look at Rectify for a moment:

The series follows Daniel Holden (Aden Young), who is released after nearly 20 years of complete isolation on Death Row and returns as an outsider to his family, to his community, and to the times. He survived the mental and emotional strain of his imprisonment, but now the walls have suddenly come crumbling down and Daniel is set free in a world he no longer understands.

rectify

The first episode can be viewed, for free, on Amazon Instant Video; keep in mind even riveting television shows with a strong following can find their way to the chopping block. Though I get the impression AMC is focused on cultivating television shows that strive to be as dynamic as the classic films AMC broadcasts regularly. This may not be enough to retain contracts, which AMC investors should weigh heavily.

Whereas Breaking Bad created entertainment value and appealed to a wide age range, Rectify currently seems to have less appeal to younger audiences. Rectify is currently paced slower, there are some similarities to Breaking Bad, like reliance on flashbacks to reveal more about the characters and plot. Additionally both Rectify and Breaking Bad are very different from conventional television shows.

Rectify has many plot points that are still being developed, it is unclear if the main character is a ‘good guy’ or not — Breaking Bad and Sopranos for instance found success by portraying unlawful characters as flawed heroes; Daniel Holden just based on the first scene of the first episode is caught between opposing groups who disagree on his guilt or innocence.

Keep in mind AMC Networks does not rely on just one show or one cable television brand, however a huge success can be a veritable gold mine. Just like gold today the entertainment business can be volatile. To get a sense for current trends check out the Nielsen Media Research Top 10 (toggle to Cable) for Cable TV:

  1. Rizzoli & Isles (TNT)
  2. Breaking Bad (AMC) (5.9M viewers)
  3. Major Crimes (TNT)
  4. Pawn Stars (HIST)
  5. Pawn Stars (HIST)
  6. Nascar Sprint Cup (ESPN)
  7. WWE Entertainment (USA)
  8. Love & Hip Hop (VH1)
  9. WWE Entertainment (USA)
  10. American Pickers (HIST)

Stock Compared to Bonds

Recently the stock market has encountered turbulence and rates have been rising significantly beyond their previous 52-week range.

Some analysts project low rated investment grade corp. bond yields to ascend towards 7%, which would send junk bond yields well north of 7%. If the AMC Networks bonds’ yield goes to 7% they would be priced in the low $700 range, so you hopefully get a sense for the downside if rates continue to soar.

Keep in mind what Moody’s stated:

The rating could be downgraded if management applies cash to fund returns to equity investors instead of reducing leverage.

Therefore the introduction of a dividend to AMC Networks stock could be doubtful. The company’s market cap. stands at $4.75B — earlier this year Bloomberg author Alex Sherman opined the controlling shareholders, the Dolan family owners of Cablevision, should sell shares of AMC after Dish Network (DISH) terminated its contract with the company for a few months.

With AMC Networks Inc.’s ability to persuade cable- and satellite-TV companies to carry its channels under threat, there’s never been a better time for the controlling Dolan family to sell the business. Alex Sherman “AMC Networks’ Surging Valuation May Prompt Sale” Bloomberg Feb. 2013

Recent SEC filings show the Dolans have disposed of hundreds of thousands of shares, subsequent Amended General Statement of Beneficial Ownership filings show the Dolans continue to own millions of shares individually and through a couple dozen family trusts.

AMC Networks stock is currently up from the price the Dolans sold for last month. It is fairly common for major owners to sell from time to time, however, barring a major takeover initiative it seems the Dolans and their numerous trusts are maintaining a large presence within AMC Networks.

The Bloomberg piece states:

Comcast Corp., News Corp. and CBS Corp. are likely buyers due to AMC’s record of developing hit shows, BTIG LLC said.

AMC Network’s prospectus for the new bonds addresses possible change of control as follows:

We may be unable to repurchase Notes in the event of a change of control.

Upon the occurrence of certain kinds of change of control events, you will have the right as a holder of the Notes, to require us to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued

Cable Companies & Producers Playing Hard Ball

The conflict between AMC & Dish, and Time Warner and CBS is troubling for investors in content producers, cable channels and cable television service providers. While shows like Breaking Bad have generated popularity, this did not stop Dish from temporarily dropping the AMC Networks, though AMC’s clout with customers led to AMC being restored to Dish. Additionally AMC and Dish were involved in a contentious lawsuit that was settled for $700M last October, resulting from Dish dropping a subsidiary network of channels in 2008.

For the few months Dish dropped AMC they switched to AXS TV, which evolved from Mark Cuban’s HDNet, founded in 2001. HDNet has seen its fair share of tough business, being dropped by Time Warner in 2009 and Cox in 2011. AMC may cost more because their popular programs require larger budgets — still it seems AMC’s shows are not overly excessive, in terms of dollars spent and value generated from successful shows.

Junk Bonds Should Be Treated As Such

Investors must recognize it is not an accident AMC currently has a low credit rating. Many investors can satisfy allocation to junk bonds through ETFs or mutual funds, though some investors could have a special interest in AMC, others may be looking at NBC Universal bonds and might add some AMC bonds to up their bond portfolio’s yield.

Having a little junk in a portfolio is fine, in my opinion, though some would disagree. AMC Networks is sort of unique, in the sense it is associated with Breaking Bad a show intertwined with popular culture these days. Additionally the relationship with Cablevision could be viewed as a positive, Charles Dolan is a superlative businessman, now 86 years old; he founded The Green Channel in 1972 which became HBO.

Though currently AMC Networks has had its share of success and profitability, television, cable and media is changing at a very fast pace. AMC’s net income went up each year from 2010 to 2012, though quarterly net income seems to fluctuate, recently net income went from $36M to $15M to $61M a quarter for instance. The company also seems to focus on avante-garde (experimental / innovative) material.

AMC Networks 4.75% 2023 bonds yield over 5% currently, in addition to the comparison to NBC Universal, I’d look at recently issued Moody’s 4.87% coupon 2024 bonds (cusip: 615369AC9) which have recently been bought for around a 5% yield, as an investment grade alternative to AMC Networks bonds.

Disclaimer: This article is not a recommendation to buy or sell. Please consult a financial adviser to determine proper allocations, if any to individual bonds. I am long Cablevision (CSC) & AMC Networks (AMCX), I am considering AMC 4.75% 2022 bonds.
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