Rating Action: Moody's affirms SeaWorld's B3 CFR and assigns Caa2 rating to proposed second priority secured notes; outlook negative
Global Credit Research - 29 Jul 2020
New York, July 29, 2020 -- Moody's Investors Service, ("Moody's") affirmed SeaWorld Parks & Entertainment, Inc.'s (SeaWorld) B3 corporate family rating and assigned a Caa2 rating to the proposed $400 million second priority senior secured notes due 2025. The existing senior secured credit facility and secured notes were upgraded to B2 from B3 and the probability of default rating (PDR) was upgraded to B3-PD from Caa1-PD. The outlook remains negative.
Net proceeds of the second priority secured note will be used primarily to repay $311 million outstanding on the revolving credit facility due 2023 and add cash to the balance sheet. The transaction increases pro forma leverage to 6x from 5.8x as of Q1 2020 (which includes the $228 million senior secured notes issued in April 2020) and raises annual interest expense by approximately $40 million depending on final pricing. Liquidity will improve as SeaWorld will have access to approximately $465 million of cash and an undrawn $332.5 million revolver as of Q2 2020. Moody's expects that the enhanced liquidity will help SeaWorld manage through 2021 even if the pandemic continues to disrupt operation of the parks.
The upgrade of the first lien credit facility and notes reflects the addition of second lien debt which provides loss absorption cushion. With the dual class debt structure, the senior secured credit facilities rank senior to the second lien debt, resulting in a one notch lift above the B3 CFR. The PDR was also upgraded to reflect an average family recovery of 50%, as opposed to the previous 65% recovery assumption when there was only one class of first lien debt. While cash and revolver availability will improve following the transaction, the speculative grade liquidity (SGL) rating remains unchanged overall at SGL-3.
..Issuer: SeaWorld Parks & Entertainment, Inc.
.... Corporate Family Rating, Affirmed B3
..Issuer: SeaWorld Parks & Entertainment, Inc.
.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD
....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)
....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD3) from B3 (LGD3)
..Issuer: SeaWorld Parks & Entertainment, Inc.
....Senior Secured 2nd priority Regular Bond/Debenture, Assigned Caa2 (LGD5)
..Issuer: SeaWorld Parks & Entertainment, Inc.
....Outlook, Remains Negative
The B3 CFR reflects the negative impact of the coronavirus outbreak on SeaWorld's ability to operate its parks, which Moody's projects will lead to substantially higher leverage and weigh on liquidity for as long as the parks continued to be constrained by the pandemic. Moody's projects SeaWorld will have more than enough liquidity to manage through 2021 even if normal operation of the parks are disrupted or perform well below historical levels for a prolonged period of time. SeaWorld has concentrated exposure to Florida and to a lesser extent California, which elevates risks to performance. In addition, some of the company's larger parks are more likely to face competition from destination parks. While SeaWorld has focused on attracting guests from nearby markets in recent years, guest traffic from national and international customers are likely to remain weak and take longer to recover due to the effects of the global pandemic on travel and leisure activities. Attendance levels at parks that are open are projected to remain well below normal levels due to the need to maintain social distancing and additional safety pre-cautions due to the pandemic. Attendance may also be negatively affected by consumer reluctance to engage in group activities in the near term. Cost saving efforts to support liquidity may also slow the rate of improvement in performance.
SeaWorld competes for discretionary consumer spending from an increasingly wide variety of other leisure and entertainment activities as well as cyclical discretionary consumer spending. The parks are highly seasonal and sensitive to weather conditions, changes in fuel prices, terrorism, public health issues (such as the coronavirus) as well as other disruptions outside of the company's control. Pro forma debt to EBITDA leverage is 6x as of Q1 2020 (including Moody's standard adjustments) and is expected to increase materially as parks operate on a limited basis or remain closed for a significant portion of the summer operating season. There is also limited visibility on when SeaWorld's parks in California will be able to open as a result of the pandemic.
SeaWorld benefits from its portfolio of parks in key markets including SeaWorld, Busch Gardens, Sesame Place as well as separately branded parks that typically generate meaningful annual attendance. SeaWorld faces negative publicity due to its orca attractions, but performance improved materially prior to the coronavirus outbreak after several years of declines. Significant expenditures on new rides and attractions that were scheduled to open in 2020, are expected to support performance after the rides are opened and lessen the need for capital expenditures in the near future. Moody's expects performance in 2021 to improve and for leverage levels to be in the in the 6x range by the end of 2021, absent any additional extended park closures.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The credit profile reflects the impact on SeaWorld of the deterioration in credit quality the pandemic has triggered, given the company's exposure to consumer entertainment. This has left the company vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
A governance impact that Moody's considers is the resignation of SeaWorld's past two CEOs after a brief tenure with the company. The CFO will act as interim CEO at least through the resumption of operations at all the company's theme parks. The Board will review the CEO role after operations resume on a normalized basis. SeaWorld is a publicly traded company listed on the NYSE.
The negative outlook reflects the impact of the coronavirus outbreak which has limited SeaWorld's ability to operate its amusement parks and Moody's expectation of operating losses and negative free cash flow in 2020. The uncertainty over the depth and duration of the pandemic will continue to pressure the company's liquidity position and lead to materially higher leverage levels in 2020. A weak economic environment, the need for consumers to maintain social distancing, and reduced travel activity will continue to weigh on performance for parks that are open.
SeaWorld's SGL-3 rating reflects Moody's expectation of materially negative free cash flow in 2020, but the company will have about $465 million of cash and an undrawn $332.5 million revolver due 2023 pro forma for the transaction as of Q2 2020. Moody's expects liquidity will deteriorate during the rest of 2020 from negative free cash flow, but remain adequate through 2021 even if the parks are unable to operate as planned for an extended period. Excess cash is likely to be used to repay debt after the affect of the pandemic subsides and park performance improves. SeaWorld spent $195 million on capex in 2019 on new rides and attractions, but Moody's projects SeaWorld will be focused on managing liquidity and will reduce capex spending materially in the near term. The large number of new rides and attractions which have not been open to the public, reduce the need for capex in the near term and may support attendance when the parks open. The parks are divisible and could be sold individually, but all of the company's assets are pledged to the credit facility and asset sales trigger 100% mandatory repayment if proceeds are not reinvested within 12 months.
The term loan is covenant light, but the revolver is subject to a springing maximum first lien secured leverage covenant ratio of 6.25x when greater than 35% is drawn. SeaWorld executed an amendment to exempt the company from the financial covenant through 2021 and allow the use of quarterly Adjusted EBITDA from the last three quarters of 2019 in place of the last three quarters of 2021 beginning in Q1 of 2022. SeaWorld will be subject to a minimum liquidity test of a minimum of $75 million until the earlier of Q3 2022 or when the company starts using actual Adjusted EBITDA in the covenant calculation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade is unlikely as long as the coronavirus outbreak limits the ability to operate SeaWorld's' amusement parks. The outlook could change to stable if the parks are projected to operate as scheduled and SeaWorld maintains a good liquidity profile with leverage levels maintained below 6.5x. Comfort that there are not any significant legislative, legal, regulatory, or activist actions that would materially impact operations would also be required. An upgrade could occur if the parks were operated as scheduled and Moody's expected leverage to be sustained under 6x, with positive revenue and EBITDA growth, and an adequate liquidity profile.
The ratings could be downgraded due to ongoing cash usage or poor operating performance that led to an elevated risk of default. Leverage sustained above 8x, or an EBITDA minus capex to interest ratio below 1x could also lead to a downgrade. Concern that SeaWorld may not be able to obtain an amendment to its covenants if needed in the future would also lead to a downgrade.
SeaWorld Entertainment, Inc., through its wholly-owned subsidiary, SeaWorld Parks & Entertainment, Inc. (SeaWorld), own and operate twelve amusement and water parks located in the US. Properties include SeaWorld (Orlando, San Diego and San Antonio), Busch Gardens (Tampa and Williamsburg) and Sesame Place (Langhorne, PA in addition to one new location in the near term). The Blackstone Group (Blackstone) acquired SeaWorld in 2009 in a leverage buyout for $2.4 billion (including fees). SeaWorld completed an initial public offering in 2013 and Blackstone exited its ownership position in 2017. SeaWorld's annual revenue was approximately $1.3 billion as of Q1 2020.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Scott Van den Bosch VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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