Fitch Initiates 'B-' IDR for Six Flags; Outlook Stable.
Six Flags Theme Parks, Inc.
--Issuer default rating 'B-';
--Bank credit facility 'BB-/RR1';
Six Flags, Inc.
--Issuer default rating 'B-';
--Senior unsecured notes 'CCC+/RR5';
--Preferred stock 'CCC-/RR6'.
The Rating Outlook is Stable. Approximately $2.4 billion of outstanding debt is covered by these actions. This includes $287.5 million of preferred stock stated at liquidation value and treated as debt.
The 'B-' IDR reflects the company's pressured credit metrics and weak operating performance. While financial commitments are currently being met, the rating indicates that significant credit risk is present with a limited margin of safety remaining and capacity for continued payment is contingent upon a sustained, favorable business and economic environment. This becomes a larger issue given the seasonality of the company's operations. Coverage ratios have been pressured with interest coverage of 1.9 times (x), and operating EBITDA to the sum of interest expense and capital expenditures of approximately 1.0x, for the last 12 months (LTM) ended Sept. 30, 2005. In addition, LTM cash from operations is less than 0.8x capital expenditures, which Fitch considers extremely weak given the capital intensive nature of the business. Six Flags' leverage in the LTM, as defined by debt to operating EBITDA and FFO adjusted leverage, was 7.0x and 7.3x, respectively.
Positively, the ratings reflect the company's leading position as the largest regional theme park operator, with strong brand awareness, broad geographic presence, solid competitive position due to the high barriers to entry and market leadership, as well as significant real estate ownership underlying many of its 30 parks. Fitch recognizes that with the successful consent solicitation of Red Zone (12% owner), a significant portion of the management team has been replaced which could eventually improve bondholder protection if stated operational changes prove to be effective. New management has indicated a commitment to deleverage Six Flags' balance sheet. In addition, the company has mentioned plans to sell some assets, cut outlays for new rides, focus aggressively on the family market, increase marketing partnerships, and improve margins. Successful execution of new management's stated strategy will be a major consideration in any future positive ratings momentum. However, the significant equity ownership positions of larger hedge funds, over 40%, could have a negative impact on bondholders as it relates to influencing fiscal policy and shareholder initiatives.
Operating margins have been steadily declining until recently, while the company's direct competitor, Cedar Fair, has been able to maintain higher margins. Over the past few years, attendance trends have been declining for the most part. In 2004, attendance for the year declined by 3%, partially offset by a 2% increase in per capita spending. However, for the nine months ended Sept. 30, 2005, comparable period-over-period attendance improved 6%, with a 4% increase in per capita spending. EBITDA has also increased significantly by 15% through the first nine months of 2005, while operating margins have improved by almost 2%, with improved attendance and higher per capita spending at its parks. It remains to be seen if this is only short term, or whether Six Flags can continue to show operational improvements evidenced in the last nine months.
Six Flags' business is also highly seasonal with more than 85% of attendance and corresponding revenue at its parks occurring in the second and third calendar quarters of each year. By comparison, many of its expenses for maintenance and costs of adding new attractions are incurred when the parks are closed in the mid to late autumn and winter months. Since the majority of Six Flags' cash flows occur in the summer months, they are vulnerable to weather, natural disasters, security threats, and other local conditions during such months. Lower attendance resulting from any such events could have a significantly negative impact on Six Flags' operations.
As of Sept. 30, 2005, Six Flags had a liquidity position of about $475 million, consisting of $359 million in revolving loans available to be drawn and $116 million of available cash. In addition, the company's near-term debt maturities are minimal until 2008. However, Six Flags is required to repay all of its outstanding term loan, currently $647 million, on Dec. 31, 2008, if its preferred stock is outstanding at that time. The company has high interest expense and capital requirements, with LTM capex at over $160 million. Although Six Flags currently has adequate liquidity to meet its near-term maturities and capital requirements, the company will have increasing difficulty to sustain its current capital structure without sustained operational improvements.
The company owns significant real estate of over 6,000 acres underlying many of its parks, which could provide an additional cushion. It has three parks up for sale currently, one in Houston and two in Oklahoma City. The Houston property appears to be very valuable. It is estimated that proceeds from the sale of this approximately 100 acre property could be between $70 million - $100 million. However, Fitch believes that many of its other properties may not be as valuable. As part of new management's strategic plan, Six Flags has also hired The Staubach Co. of Dallas to conduct a full assessment of the company's substantial real estate assets.
The Recovery Ratings and notching in the debt structure reflect Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. The recovery ratings for the bank credit facility ('RR1', reflecting expected 91%-100% recovery) benefit from substantial enterprise value, as well as borrowing limitations due to maintenance covenants. The senior unsecured notes ('RR5', reflecting expected recovery of 11%-30%) reflect below-average recovery prospects in a distressed case due to structural and effective subordination with respect to bank debt. The preferred stock ('RR6', reflecting expected recovery of 0%-10%) reflects poor recovery prospects in a distressed case.
|Printer friendly Cite/link Email Feedback|
|Date:||Feb 24, 2006|
|Previous Article:||CHEP Donates More Than $86,000 to Charity in 2005.|
|Next Article:||NCL Corporation Ltd. to Hold Conference Call on 2005 Earnings.|