SeaWorld Entertainment, Inc.
New Coverage/Tear Sheets: As Amusement Parks Remain Closed, SeaWorld, Cedar Fair Could Face Liquidity Issues; Six Flags Can Likely Withstand Sustained Closures
Mon 04/06/2020 15:15 PM
Relevant Documents:
SeaWorld’s Debt Documents
SeaWorld Covenants Tear Sheet
Six Flags’ Debt Documents
Six Flags Covenants Tear Sheet
Cedar Fair's Debt Documents
Because of the spread of the coronavirus, almost all companies within the travel, leisure and hospitality industries have had to shutter stores or cease operations with no concrete timeline for when businesses can reopen. Entertainment and amusement park businesses have unsurprisingly felt the impact of the contagion: SeaWorld Entertainment, Cedar Fair and Six Flags Entertainment have all closed their parks in recent weeks, and on March 27, SeaWorld announced that it was furloughing 90% of its employees as of April 1.
Although neither SIx Flags nor Cedar Fair have announced any draws on their revolving credit facilities, on March 23 SeaWorld announced that it drew the remaining $187.5 million of commitments under its revolving credit facility “as a precautionary measure to increase its cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.” The company further disclosed that “[t]he proceeds from the incremental Revolving Credit Facility borrowings are currently being held on the Company’s balance sheet.”
In this piece, we discuss each of these companies’ current liquidity, including their ability to draw on their revolvers and remain in compliance with financial maintenance covenants under their debt documents. We also focus on each company’s ability to meet its near-term payment obligations in a low-EBITDA environment while also complying with its financial covenants. We find that of the amusement parks reviewed, SeaWorld is the most likely to face near-term liquidity issues in the current environment, and that if Cedar Fair is forced to draw on its revolver, that might cause a breach of its financial covenant.
Our findings are summarized in the below table and discussed in more detail further below.
As illustrated in the table above, SeaWorld’s credit agreement contains a springing financial covenant for the benefit of the revolving lenders only that requires SeaWorld to comply with a 6.25x net first lien leverage ratio. The covenant is tested if the sum of letters of credit in excess of $30 million and revolver borrowings exceeds 35% of revolving commitments (which translates into revolving borrowings in excess of $117 million).
SeaWorld’s recent revolver draw triggered the maintenance covenant, but because the covenant permits all cash to be netted and because the company used the proceeds to increase balance sheet cash, its pro forma first lien leverage ratio remained at 3.4x.
Nevertheless, even if the company used the proceeds to fund operations, its first lien leverage ratio would increase to only 3.7x which would still provide it with a significant cushion for remaining in compliance with the 6.25x first lien test. After the revolver drawdown, the total amount outstanding on the revolver borrowings was $313 million, so the covenant was tested for the period ended March 31.
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $278 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31, 2019, was $468 million, the company’s EBITDA would need to decline by about 41% before it is unable to meet the covenant.
After the March 23 revolver drawdown, the company had $203 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will not be able to meet its $370 million of upcoming debt, interest, capital expenditures and lease payments due in 2020.
Six Flags’ senior secured term loan and revolving credit facility includes a 4x senior secured leverage ratio for the benefit of all lenders; the company is permitted to net $50 million of unrestricted cash from debt for purposes of calculating leverage ratios.
As of Dec. 31, Six Flags had no outstanding borrowings under its $350 million revolver, and its secured leverage was approximately 1.4x.
Assuming a full draw of the revolver, LTM EBITDA as of March 31 would need to fall to $269 million to cause Six Flags to be in breach of its maintenance covenant.
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $203 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31 was $527 million, the company’s EBITDA would need to decline by about 61% before it is unable to meet the covenant.
Liquidity
As of Dec. 31, the company had $503 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will be able to meet its $313 million of upcoming debt, interest, capital expenditures and purchase obligation payments due in 2020.
Cedar Fair’s term loan and revolving credit facility includes a 5.5x leverage ratio covenant that is calculated without netting cash; as of Dec. 31, the revolver was undrawn, and the company’s total leverage was about 4.3x
As illustrated below, assuming constant EBITDA, fully drawing on the revolver would increase Cedar Fair’s leverage ratio to 4.8x, which is still below the 5.5x level and in compliance with the covenant.
However, assuming the revolver is drawn in full, if LTM EBITDA for the period ending March 31 were to fall to $443 million (which represents a decline of only 12%), its leverage would exceed the 5.5x threshold.
If the company were to breach its financial covenant, that would constitute an event of default under its credit agreement. Following such breach, with consent of 50% of the revolving lenders, the agent may give notice to the company that the revolving commitments have been terminated and that all outstanding amounts are due.
Cross-default provisions under the company’s senior unsecured notes would be triggered by the breach only if the revolver is accelerated and uncured for 30 days after such acceleration.
EBITDA Cushion
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $402 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31 was $505 million, the company’s EBITDA would need to decline by about 20% before it is unable to meet the covenant.
Liquidity
As of Dec. 31, the company had $442 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will be able to meet its $176 million of upcoming debt, interest, capital expenditures and purchase obligation payments due in 2020.
SeaWorld’s Debt Documents
SeaWorld Covenants Tear Sheet
Six Flags’ Debt Documents
Six Flags Covenants Tear Sheet
Cedar Fair's Debt Documents
Because of the spread of the coronavirus, almost all companies within the travel, leisure and hospitality industries have had to shutter stores or cease operations with no concrete timeline for when businesses can reopen. Entertainment and amusement park businesses have unsurprisingly felt the impact of the contagion: SeaWorld Entertainment, Cedar Fair and Six Flags Entertainment have all closed their parks in recent weeks, and on March 27, SeaWorld announced that it was furloughing 90% of its employees as of April 1.
Although neither SIx Flags nor Cedar Fair have announced any draws on their revolving credit facilities, on March 23 SeaWorld announced that it drew the remaining $187.5 million of commitments under its revolving credit facility “as a precautionary measure to increase its cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.” The company further disclosed that “[t]he proceeds from the incremental Revolving Credit Facility borrowings are currently being held on the Company’s balance sheet.”
In this piece, we discuss each of these companies’ current liquidity, including their ability to draw on their revolvers and remain in compliance with financial maintenance covenants under their debt documents. We also focus on each company’s ability to meet its near-term payment obligations in a low-EBITDA environment while also complying with its financial covenants. We find that of the amusement parks reviewed, SeaWorld is the most likely to face near-term liquidity issues in the current environment, and that if Cedar Fair is forced to draw on its revolver, that might cause a breach of its financial covenant.
Our findings are summarized in the below table and discussed in more detail further below.
SeaWorld
Financial Covenant Compliance as a Result of the Revolver Draw
As illustrated in the table above, SeaWorld’s credit agreement contains a springing financial covenant for the benefit of the revolving lenders only that requires SeaWorld to comply with a 6.25x net first lien leverage ratio. The covenant is tested if the sum of letters of credit in excess of $30 million and revolver borrowings exceeds 35% of revolving commitments (which translates into revolving borrowings in excess of $117 million).
SeaWorld’s recent revolver draw triggered the maintenance covenant, but because the covenant permits all cash to be netted and because the company used the proceeds to increase balance sheet cash, its pro forma first lien leverage ratio remained at 3.4x.
Nevertheless, even if the company used the proceeds to fund operations, its first lien leverage ratio would increase to only 3.7x which would still provide it with a significant cushion for remaining in compliance with the 6.25x first lien test. After the revolver drawdown, the total amount outstanding on the revolver borrowings was $313 million, so the covenant was tested for the period ended March 31.
EBITDA Cushion
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $278 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31, 2019, was $468 million, the company’s EBITDA would need to decline by about 41% before it is unable to meet the covenant.
Liquidity
After the March 23 revolver drawdown, the company had $203 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will not be able to meet its $370 million of upcoming debt, interest, capital expenditures and lease payments due in 2020.
Six Flags
Ability to Access Revolver
Six Flags’ senior secured term loan and revolving credit facility includes a 4x senior secured leverage ratio for the benefit of all lenders; the company is permitted to net $50 million of unrestricted cash from debt for purposes of calculating leverage ratios.
As of Dec. 31, Six Flags had no outstanding borrowings under its $350 million revolver, and its secured leverage was approximately 1.4x.
Assuming a full draw of the revolver, LTM EBITDA as of March 31 would need to fall to $269 million to cause Six Flags to be in breach of its maintenance covenant.
EBITDA Cushion
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $203 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31 was $527 million, the company’s EBITDA would need to decline by about 61% before it is unable to meet the covenant.
Liquidity
As of Dec. 31, the company had $503 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will be able to meet its $313 million of upcoming debt, interest, capital expenditures and purchase obligation payments due in 2020.
Cedar Fair
Ability to Access Revolver
Cedar Fair’s term loan and revolving credit facility includes a 5.5x leverage ratio covenant that is calculated without netting cash; as of Dec. 31, the revolver was undrawn, and the company’s total leverage was about 4.3x
As illustrated below, assuming constant EBITDA, fully drawing on the revolver would increase Cedar Fair’s leverage ratio to 4.8x, which is still below the 5.5x level and in compliance with the covenant.
However, assuming the revolver is drawn in full, if LTM EBITDA for the period ending March 31 were to fall to $443 million (which represents a decline of only 12%), its leverage would exceed the 5.5x threshold.
If the company were to breach its financial covenant, that would constitute an event of default under its credit agreement. Following such breach, with consent of 50% of the revolving lenders, the agent may give notice to the company that the revolving commitments have been terminated and that all outstanding amounts are due.
Cross-default provisions under the company’s senior unsecured notes would be triggered by the breach only if the revolver is accelerated and uncured for 30 days after such acceleration.
EBITDA Cushion
Assuming constant outstanding debt and cash, the company must maintain a minimum EBITDA of $402 million in order to remain in compliance with the maintenance covenant. Given that the company’s LTM EBITDA as of Dec. 31 was $505 million, the company’s EBITDA would need to decline by about 20% before it is unable to meet the covenant.
Liquidity
As of Dec. 31, the company had $442 million of immediately accessible liquidity. On the basis of its current liquidity position, the company will be able to meet its $176 million of upcoming debt, interest, capital expenditures and purchase obligation payments due in 2020.
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