TEXT-S&P cuts SeaWorld to 'B+'

Tue Mar 13, 2012 1:37pm EDT

(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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