Moody's Cuts SeaWorld's (SEAS) Revolving, Term Loan B-2 Rating Amid New Debt Structure

Moody's Investors Service (Moody's) downgraded SeaWorld Parks and Entertainment, Inc.'s (SeaWorld)(NYSE: SEAS) existing revolving and term loan B-2 rating to B1 from Ba3 and assigned a B1 rating to the proposed new term loan B-3. The B1 corporate family rating (CFR) was affirmed at B1, but the probability of default rating (PDR) was downgraded to B2-PD from B1-PD. The outlook remains stable.

The use of proceeds of the proposed $280 million term loan B-3 is the repayment of the $260 million 11% senior note due 2016 (not rated by Moody's) in addition to the payment of call premiums and transaction expenses. The downgrade of the revolver and term loan B-2 reflects the removal of the subordinated debt which results in an all first lien capital structure.

The transaction is expected to increase debt by $20 million, extend out its debt maturity schedule, and generate material interest expense savings from the refinancing of 11% coupon debt.

A summary of Moody's actions are as follows:

SeaWorld Parks and Entertainment, Inc

New 1st lien term loan B-3 facility due May 2020, assigned B1 (LGD3)

Corporate Family Rating, affirmed at B1

Probably of Default Rating, downgraded to B2-PD from B1-PD

Revolving credit facility due April 2018, downgraded to B1 (LGD3) from Ba3 (LGD3)

1st lien term loan B-2 facility due May 2020, downgraded to B1 (LGD3) from Ba3 (LGD3)

Speculative Grade Liquidity Rating, downgraded to SGL-3 from SGL-2

Outlook: stable

SUMMARY RATING RATIONALE

SeaWorld's B1 (CFR) reflects the portfolio of eleven regional and destination theme and water parks and weak operating performance during 2014 which increased leverage from 4.3x as of Q2 2014 (including Moody's lease adjustments which capitalize lease expense at 6x) to 4.7x as of Q4 2014. The parks are highly seasonal and sensitive to cyclical discretionary consumer spending, weather conditions, changes in fuel prices, public health issues as well as other disruptions outside of the company's control. The rating also reflects negative publicity from its killer whale shows and legislative attempts in California to ban the shows in that state. Despite weaker performance, the company still generates meaningful annual attendance (over 22 million in FY 2014) and benefits from adequate cash flow generation to fund a significant ongoing capital program and pay dividends. The value of its portfolio of parks is also substantial and provides significant asset protection.

SeaWorld has an adequate liquidity position as reflected in our SGL-3 rating supported by cash of $44 million as of Q4 2014 and free cash flow to cover capital spending, required debt service, and dividends. We expect seasonal reliance on the $192.5 million revolver (undrawn at Q4 2014 except for $18 million of letters of credit) which matures in April 2018.

Moody's anticipates the company will maintain access to the revolver and remain in compliance with the credit facility covenants (based on the credit agreement definitions). The total leverage covenant is set at 5.75x and the interest coverage ratio is set at 2.05x for the life of the loan as calculated in the credit agreement.

The stable rating outlook reflects our expectation that SeaWorld will experience low single digit percentage revenue and EBITDA declines in 2015. Marketing campaigns and easier yoy comparisons will benefit the company, but negative publicity from animal activist campaigns and competitive park offerings in Orlando are expected to remain significant headwinds for the company.

Given recent weak performance, an upgrade is not expected in the near term. Positive rating pressure would occur if the company generates positive revenue, attendance and EBITDA growth that caused leverage to decline below 4.25x (as calculated by Moody's) on a sustained basis. Comfort that there were not any significant legislative, regulatory, or activist actions that would materially impact operations would also be required as would a good liquidity position.

Downward rating pressure could result from continued poor operating performance due to negative publicity or economic weakness, debt funded equity friendly transactions, or debt financed acquisitions that led to leverage increasing above 5.25x (as calculated by Moody's). Legislative or regulatory actions that are expected to materially impact its business model could also result in negative rating pressure. A weakened liquidity profile or failure to maintain an adequate cushion of compliance with covenants could also lead to a downgrade.

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