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SeaWorld Parks & Entertainment, Inc. -- Moody's upgrades SeaWorld's CFR to B1; outlook stable

·17 min read

Rating Action: Moody's upgrades SeaWorld's CFR to B1; outlook stableGlobal Credit Research - 17 Aug 2022New York, August 17, 2022 -- Moody's Investors Service (Moody's) upgraded SeaWorld Parks & Entertainment, Inc.'s (SeaWorld) corporate family rating (CFR) to B1 from B2, and the senior unsecured notes to B3 from Caa1. The senior secured first lien notes and credit facility (including a revolver and term loan B) were affirmed at Ba3. The outlook is stable.The upgrade of the CFR and stable outlook reflect SeaWorld's very strong recovery from the pandemic as a result of ongoing consumer demand, pricing initiatives, and effective expense management which has led to a reduction in leverage to 3.4x as of Q2 2022. High inflation rates and slower economic growth will weigh on operating performance in the near term, but further improvements in attendance toward pre-pandemic levels is likely to support additional growth in 2023.The senior secured notes and credit facility were affirmed at Ba3, one notch above the CFR, which considers the relatively high percentage of secured debt in the capital structure.Moody's expects SeaWorld will maintain a strong liquidity position as a result of cash on the balance sheet of $161 million, access to an undrawn $390 million revolving credit facility due 2026, and Free Cash Flow (FCF) as a percentage of debt in the mid to high teens over the next year. As a result, SeaWorld's Speculative Grade Liquidity (SGL) rating was upgraded to SGL-1 from SGL-2.A summary of today's actions are as follows:Upgrades:..Issuer: SeaWorld Parks & Entertainment, Inc..... Corporate Family Rating, Upgraded to B1 from B2.... Probability of Default Rating, Upgraded to B1-PD from B2-PD.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2....Senior Unsecured Regular Bond/Debenture, Upgraded to B3 (LGD5) from Caa1 (LGD5)Affirmations:..Issuer: SeaWorld Parks & Entertainment, Inc.....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)....Senior Secured 1st Lien Regular Bond/Debenture, Affirmed Ba3 (LGD3)Outlook Actions:..Issuer: SeaWorld Parks & Entertainment, Inc.....Outlook, Remains StableRATINGS RATIONALEThe B1 CFR reflects the very strong improvement in operating performance with EBITDA well above pre-pandemic levels, and substantial FCF generation ($370 million LTM Q2 2022). While further improvement will likely be impacted by high inflation rates and slower economic growth in the near term, Moody's expects SeaWorld will benefit from attendance growth toward pre-pandemic levels in 2023 driven by new rides and attractions. Strong expense management and additional pricing strategies will also support performance. SeaWorld has concentrated exposure to five different states in the US, but less restrictive health requirements during the pandemic benefited performance at its parks in Florida (which is its largest market with five parks) and Texas. Parks located in California, Virginia, and Pennsylvania were impacted by more restrictive conditions until June 2021.SeaWorld benefits from its portfolio of parks in key markets including SeaWorld, Busch Gardens, and Sesame Place as well as separately branded parks that generate meaningful annual attendance. Significant expenditures on new rides and attractions prior to the pandemic and additional spending going forward will also support performance through 2023.SeaWorld's parks in Orlando face competition from destination parks, although the company has focused on attracting guests from nearby markets in recent years. Guest traffic from international customers will take longer to recover, but represent a relatively small portion of overall attendance. 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, terrorism, public health issues as well as other disruptions outside of the company's control.ESG CONSIDERATIONSSeaWorld's ESG Credit Impact Score is highly-negative (CIS-4) driven by the company's governance risk (G-4). While SeaWorld has significantly reduced leverage levels driven by EBITDA growth, the company has also completed significant stock repurchases both prior to and following the pandemic and the company made an unsuccessful attempt to acquire Cedar Fair, L.P. in Q1 2022. There has also been elevated levels of turnover within senior management, including the resignation of SeaWorld's past two CEOs after a brief tenure with the company. The current CEO, who has been with the Company for over 20 years in various roles including the CFO, was appointed as the CEO in 2021 after acting as interim CEO since April 2020. SeaWorld is a publicly traded company listed on the NYSE, but financial sponsor, Hill Path Capital LP, maintains a significant ownership position with the founder of Hill Path serving as Chairman of the Board.The stable outlook reflects Moody's expectations that results will continue to improve going forward driven by attendance growth, effective pricing and cost management which will lead to leverage decreasing to the low 3x range in 2023. High inflation rates and slower economic growth may moderately elevate volatility in operating performance in the near term, but Moody's expects revenue and profitability will improve over time as attendance grows due to good consumer demand for out of home entertainment. SeaWorld will continue to generate strong operating cash flow which will fund high levels of capex spend on new rides and attractions, including the potential development of hotels and additional Sesame Place parks. These investments will help support rising guest attendance levels and an increase in average revenue per guest.SeaWorld's SGL-1 reflects $161 million of cash on the balance sheet as of Q2 2022 and an undrawn $390 million revolver due August 2026. Moody's expects SeaWorld will maintain FCF as a percentage of debt in the mid to high teens in 2023, although a significant portion is likely to be used on additional share repurchases ($455 million YTD Q2 2022). SeaWorld will spend approximately $180 to $200 million in capex in 2022 which is in line with pre-pandemic levels ($195 million of capex in 2019). The expenditures will be used on new technology, infrastructure, rides and attractions. The large number of new rides and attractions from capex prior to the pandemic as well as new attractions going forward will continue to support a recovery in attendance through 2023. 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 net first lien secured leverage covenant ratio of 6.25x when greater than 35% is drawn.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSSeaWorld's ratings could be upgraded if Moody's expected leverage to be sustained in the low 3x range and the company maintained a conservative financial policy consistent with a higher rating level. A strong liquidity position would also be required with FCF as a percentage of debt in the mid to high teens.SeaWorld's ratings could be downgraded if Moody's expected leverage to be sustained above 5x as a result of debt funded acquisitions or equity friendly transactions. A weakened liquidity position could also lead to ratings pressure.SeaWorld Entertainment, Inc., through its wholly-owned subsidiary, SeaWorld Parks & Entertainment, Inc. (SeaWorld), own and operate twelve theme park and water parks located in the US. Properties include SeaWorld and Aquatica (Orlando, San Diego and San Antonio), Busch Gardens (Tampa and Williamsburg), Discovery Cove (Orlando) and Sesame Place (Langhorne, PA and San Diego, CA). The Blackstone Group Inc. (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 revenue was approximately $1.7 billion as of LTM Q2 2022.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. 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