06.12.2012 01:54:00
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Six Flags Entertainment Corporation -- Moody's assigns B3 rating to Six Flags' proposed unsecured notes due 2021; B1 CFR not affected
New York, December 05, 2012 -- Moody's Investors Service assigned a B3 rating to Six Flags Entertainment Corporation's (Six Flags) proposed $600 million senior unsecured notes due 2021, and upgraded the credit facility ratings of Six Flags Theme Parks Inc. (SFTP; Six Flag's wholly-owned subsidiary) to Ba2 from B1. Moody's is transferring the B1 Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to Six Flags from SFTP since Six Flags is now the top level debt issuer within the organization. Six Flags' B1 PDR is one notch above the prior B2 PDR at SFTP to reflect a change in the mean family recovery rate from 65% to a 50% level that is typical for companies with multiple classes of debt. Moody's updated the loss given default assessments to reflect the revised debt structure. The rating outlook is stable.
Assignments:
..Issuer: Six Flags Entertainment Corporation
....Corporate Family Rating, Assigned B1
....Probability of Default Rating, Assigned B1
....Speculative Grade Liquidity Rating, Assigned SGL-2
....Senior Unsecured Regular Bond/Debenture, Assigned B3, LGD5 - 79%
Upgrades:
..Issuer: Six Flags Theme Parks Inc.
....Senior Secured Bank Credit Facility (Revolver and Term Loans), Upgraded to Ba2, LGD2 - 25% from B1, LGD2 - 29%
Withdrawals:
..Issuer: Six Flags Theme Parks Inc.
....Corporate Family Rating, Withdrawn, previously rated B1
....Probability of Default Rating, Withdrawn, previously rated B2
....Speculative Grade Liquidity Rating, Withdrawn, previously rated SGL-4
RATINGS RATIONALE
Six Flags plans to utilize the net proceeds from the proposed bond offering to fund up to $350 million of share repurchases and other general corporate purposes over the next 18 months, to repay its $72 million term loan A and partially pay down its $860 million term loan B. The increase in debt is negative and will raise debt-to-EBITDA leverage to approximately 5.1x (LTM 9/30/12 incorporating Moody's standard adjustments, the partnership puts as debt, and the proposed refinancing). The increase in debt and leverage was anticipated in the November 27 change to the company's rating outlook to stable from positive, which followed SFTP's announcement that it planned to amend its credit facility to provide greater flexibility to issue debt to fund additional restricted payments by Six Flags.
Cash interest expense will also increase by roughly $16-$17 million. The planned share repurchases will reduce the dividend outlay and could largely or fully offset the incremental cash interest depending on the number of shares repurchased. Moody's still considers the mix effect on cash uses to be negative as dividends can be reduced or cut to preserve cash while interest is not an outlay that can be voluntarily deferred or avoided.
Six Flags' B1 CFR reflects the sizable attendance and revenue generated from the geographically diversified regional amusement park portfolio, vulnerability to cyclical discretionary consumer spending, high leverage, liquidity and funding risks associated with minority holders' annual right to put their share of partnership parks to the company, and event risk relating to shareholder distributions and ownership transitions. The amusement park industry is mature and operators must compete with a wide variety of leisure and entertainment activities to generate consumer interest, with attendance growth in the low single digit range expected over the next 3-5 years. The new management team installed in conjunction with the company's emergence from bankruptcy in April 2010 has implemented significant operational improvements to drive meaningful earnings growth. Moody's believes ongoing operational initiatives including yield management and an emphasis on season pass sales will continue to grow revenue and earnings over the intermediate term, although there is downside risk if the economy were to weaken. Moody's projects Six Flags' will generate moderately positive free cash flow after the recently increased dividend, and that debt-to-EBITDA leverage will fall to a mid 4x range over the next two years.
The proposed notes will be guaranteed by substantially all wholly-owned material domestic subsidiaries (this excludes the partnership parks), and will be effectively subordinated to SFTP's secured credit facility. The proposed note indenture permits restricted payments if consolidated debt-to-cash flow (similar to EBITDA) is less than 5.0x and the payments fall within an EBITDA -- 1.5x interest basket. Dividends for the first three quarters of 2013, up to $350 million of share repurchases, and any payments related to the partnership parks (including put obligations) are nevertheless permitted without having to meet the 5.0x leverage and EBITDA -- 1.5x builder basket at the time of payment (although dividends for the second and third quarters of 2013 would count against the builder basket). Incremental debt is permitted under the indenture if consolidated debt-to-cash flow is less than 5.5x. A credit facility up to $1.435 billion, the guarantee of HWP's debt (Great Escape Lodge), and up to $45 million of Partnership Park revolvers are permitted without having to meet the 5.5x debt-to-cash flow incurrence ratio. Debt issued to fund Partnership Park puts would need to meet the 5.5x incurrence test if not funded within the credit facility carve-out.
Six Flags' SGL-2 rating is effectively an upgrade from the SGL-4 rating at SFTP. The change reflects that the bond offering proceeds will temporarily increase cash (to approximately $630 million as of 9/30/12 pro forma for the offering) and improve the company's liquidity position leading into the next partnership put exercise period, depending on the timing of share repurchases. Roughly $350 million of potential partnership puts are exercisable annually from March 31 through late April and Six Flags must fund any exercises by May 15th. Moody's also estimates Six Flags will have seasonal cash needs of approximately $175 million over the next 5-6 months. Moody's expects that the cash proceeds will be utilized to repurchase stock over the next 12 months and the speculative-grade liquidity rating is likely to return to SGL-4 once the proceeds are deployed.
The stable rating outlook reflects Moody's view that Six Flags will continue to grow revenue and earnings absent significant economic headwinds, generate modestly positive free cash flow, and reduce debt-to-EBITDA to a mid 4x range by 2014.
Downward rating pressure could result if acquisitions, cash distributions to shareholders, ownership transitions, or declines in attendance and earnings driven by competition or a prolonged economic downturn lead to debt-to-EBITDA above 5.75x or CFO less capital spending-to-debt of less than 4%. Ratings could also be pressured if liquidity weakens - including if concerns arise regarding the company's ability to meet partnership put obligations -- or the company's financial policies become more aggressive.
A good liquidity position including sufficient cash, projected free cash flow and committed financing to fully cover potential partnership park put exercises would be necessary for an upgrade. Stable to improving operating performance and margins, management of shareholder distributions within excess cash and free cash flow, and a conservative leverage profile could position the company for an upgrade. Increased financial capacity to manage event risks such as debt-to-EBITDA in a low 4x range or lower and strong CFO less capital spending-to-debt would be necessary for an upgrade.
Please see the ratings tab on Six Flags' issuer page on www.Moodys.com for the last credit rating action and rating history. Please see Six Flags' credit opinion on www.Moodys.com for additional information on the company's ratings.
Six Flags' ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Six Flags' core industry and believes Six Flags' ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Six Flags, headquartered in Grand Prairie, TX, is a regional theme park company that operates 18 North American parks. The park portfolio includes 14 wholly-owned facilities (including parks near New York City, Chicago and Los Angeles) and three consolidated partnership parks - Six Flags over Texas (SFOT), Six Flags over Georgia (SFOG), and White Water Atlanta - as well as Six Flags Great Escape Lodge, which is a consolidated joint venture. Six Flags currently owns 53.0% of SFOT and approximately 30.5% of SFOG/White Water Atlanta. Revenue including full consolidation of the partnership parks and joint venture was approximately $1.06 billion for the LTM period ended 9/30/12.
REGULATORY DISCLOSURES
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John E. Puchalla VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653John Diaz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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