(The following statement was released by the rating agency)
-- 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
-- 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.
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
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
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.
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
-- 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
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.
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.
SeaWorld Parks & Entertainment Inc.
Corporate Credit Rating B+/Stable/-- BB-/Stable/--
SeaWorld Parks & Entertainment Inc.
$500 mil incremental term loan B BB-(prelim)
Recovery Rating 2(prelim)
Downgraded And Placed On CreditWatch
SeaWorld Parks & Entertainment Inc.
Senior Secured BB/Watch Neg BB+
Recovery Rating 1 1
(Caryn Trokie, New York Ratings Unit)