TEXT-S&P cuts SeaWorld to 'B+'
(The following statement was released by the rating agency) Overview -- U.S. theme park operator SeaWorld is seeking an amendment to its senior secured credit agreement to allow for a $500 million incremental term loan B, the proceeds of which it will use to fund a distribution to the owners. -- We are lowering our corporate credit rating on SeaWorld to 'B+' from 'BB-' and our issue-level rating on its existing senior secured credit facility to 'BB' from 'BB+', placing the issue-level rating on CreditWatch with negative implications. -- We are also assigning our preliminary 'BB-' issue-level and preliminary '2' recovery ratings to the proposed $500 million incremental term loan B. -- The stable rating outlook reflects our expectation for adjusted leverage to remain around 5x over the intermediate term, in line with our 'B+' corporate credit rating. Rating Action On March 13, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Orlando-based SeaWorld Parks & Entertainment Inc. to 'B+' from 'BB-'. The rating outlook is stable. In addition, we lowered our issue-level rating on the company's senior secured credit facility, which currently consists of a $172.5 million revolver, a $160 million term loan A, and an $844 million term loan B, to 'BB' from 'BB+', placing the issue-level rating on CreditWatch with negative implications. The recovery rating remains a '1', indicating our expectation of very high (90% to 100%) recovery for lenders in the event of a payment default. However, upon closing of the proposed transaction, we will revise our recovery rating on the existing senior secured credit facility to '2' from '1' and lower our issue-level rating to 'BB-' from 'BB', in accordance with our notching criteria. At the same time, we assigned our preliminary 'BB-' issue-level rating to SeaWorld's proposed $500 million incremental term loan B. The preliminary recovery rating is '2', indicating our expectation of substantial (70% to 90%) recovery for lenders in the event of a payment default. The company intends to use the proceeds of the incremental term loan to fund a distribution to SeaWorld's owners. Rationale The downgrade reflects the expected spike in adjusted leverage to over 5x following the proposed transaction from around 4x at Dec. 31, 2011, and our expectation that leverage will remain around 5x over the intermediate term, in line with the 'B+' rating. The downgrade also reflects our belief that the owners will maintain an aggressive financial policy with respect to distributions, which we expect will preclude any sustained meaningful improvement in credit measures, even if SeaWorld's credit measures improve over the next few years. Our 'B+' corporate credit rating on SeaWorld reflects our assessment of the company's business risk profile as "fair" and our assessment of the company's financial risk profile as "aggressive" (according to our criteria). We have revised our assessment of SeaWorld's business risk profile to fair from "weak" (according to our criteria), reflecting recent strong performance, including improvement in its EBITDA margin from the realization of cost-reduction efforts, and our belief the company will maintain an EBITDA margin in the high-20% area. While this level of profitability is still below other rated theme park operators, it compares favorably with many issuers in the leisure space. The re-assessment also reflects our belief that the company will continue to benefit from productive investments made in the business on new attractions. We believe these positive factors are partially offset by the company's EBITDA concentration in a few of its parks, its reliance on consumer discretionary spending, the capital intensity of the theme park business, and the seasonal nature of several of its parks. Our assessment of SeaWorld's financial risk profile as aggressive reflects our belief that the owners will maintain an aggressive financial policy with respect to distributions, and our expectation for adjusted leverage to remain around 5x over the intermediate term. Our ratings currently incorporate our expectation for a slight decline in attendance and flat year-over-year per capita spending in 2012, which we believe would translate into a low-single-digit percent decline in revenue. We expect only slight growth in attendance and per-capita spending in 2013. This scenario reflects our economists' current expectation for only modest growth in consumer spending in 2012 and 2013 and for unemployment to remain high (our economists' forecast is for unemployment remaining over 8% through 2013). We remain somewhat cautious that a weaker economic recovery could pressure attendance and per-capita spending this year and our economists are currently forecasting a 25% risk (albeit down from as high as 40% in 2011) of the U.S. falling into a recession. Nevertheless, we believe the company will sustain cost controls and maintain EBITDA margin in the high-20% area, which would result in EBITDA declining only modestly in 2012 and growing slightly in 2013. Based on preliminary 2011 year-end results, revenue and EBITDA (adjusted for one-time charges) increased 9.6% and 18.3%, respectively. The revenue growth reflected a 5.3% increase in attendance and a 4.0% increase in per-capita spending, which was driven in part by new attractions at eight of SeaWorld's 10 parks, as well as more favorable weather. In addition to benefiting from higher revenues, the EBITDA growth also partly reflected cost controls put in place since the transition of ownership in late 2009. At Dec. 31, 2011, we estimate adjusted leverage and interest coverage were around 4.0x and 3.2x, respectively. Pro forma for the proposed transaction, however, we expect adjusted leverage to exceed 5.0x. SeaWorld owns and operates 10 parks in six metropolitan markets. Its portfolio of parks includes attractions such as unique animal exhibits and shows, as well as thrill rides. The portfolio is also a mix of regional and destination parks, which only partially insulates the company from regional economic or other disturbances that can affect demand for leisure travel. SeaWorld has some EBITDA concentration among its parks, given that three of the parks contribute around two-thirds of total EBITDA. Liquidity Based on its likely sources and uses of cash over the next 12 to 18 months and incorporating our performance expectation, SeaWorld has an "adequate" liquidity profile (according to our criteria). Relevant factors in our assessment of SeaWorld's liquidity profile include the following: -- We expect the company's sources of cash to exceed its uses by 1.2x or more. -- We expect that sources of cash will exceed uses of cash, even if forecasted EBITDA were to decline by 15%. -- We believe SeaWorld has a sound relationship with banks. -- We believe the company has a generally satisfactory standing in credit markets. At Dec. 31, 2011, SeaWorld had $136.5 million of availability under its $172.5 million revolver. Pro forma for the proposed amendment to the credit agreement, interest expense is expected to increase around $20 million, which will be partially offset by an expected $10 million reduction in interest expense from the anticipated reduction in the coupon on SeaWorld's existing senior unsecured notes to 11.0% from 13.5%. Despite the increase in interest expense, we expect operating cash flow will be sufficient to fund capital expenditures, which we estimate to be around 10% of our expected revenue. We believe remaining cash generated from operations will be sufficient to fund around $21.3 million in total annual term loan amortization payments as well as modest incremental term loan reduction given excess cash flow sweep provisions in SeaWorld's credit agreement. Following the planned $500 million distribution to its owners, SeaWorld is restricted in the amount of further distributions it can make given provisions under the amended agreement. We do not expect SeaWorld to fund further distributions from free cash flow over the intermediate term given the restrictions. As part of the proposed amendment, the consolidated net leverage covenant is expected to be modified, and we expect the cushions with respect to this covenant will remain over 15% over the next several quarters. While the interest coverage covenant is not likely to be modified, we also expect the cushion to remain well over 15% over the next several quarters. Aside from amortization payments, SeaWorld will face no debt maturities until early 2016, when its revolver and term loan A mature. Outlook The stable rating outlook reflects our expectation that adjusted leverage will remain around 5x over the intermediate term, in line with the 'B+' rating given our assessment of SeaWorld's business risk profile as fair. We would consider lower ratings if performance is significantly weaker than we currently anticipate, or if the company pursues additional debt-financed distributions that result in adjusted leverage increasing above 5.5x on a sustained basis. Higher ratings are unlikely at this time given our performance expectations and our belief that the owners will maintain an aggressive financial policy regarding distributions. Ratings List Downgraded To From SeaWorld Parks & Entertainment Inc. Corporate Credit Rating B+/Stable/-- BB-/Stable/-- New Ratings SeaWorld Parks & Entertainment Inc. Senior Secured $500 mil incremental term loan B BB-(prelim) Recovery Rating 2(prelim) Downgraded And Placed On CreditWatch To From SeaWorld Parks & Entertainment Inc. Senior Secured BB/Watch Neg BB+ Recovery Rating 1 1 (Caryn Trokie, New York Ratings Unit)
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