Moody's Lowers Outlook on SeaWorld Entertainment (SEAS) to Stable

Moody's Investors Service (Moody's) changed the rating outlook for SeaWorld Entertainment (NYSE: SEAS) (SeaWorld) to stable from positive. The B1 corporate family rating (CFR) and Ba3 debt ratings were affirmed

The change in outlook reflects weak performance during the first half of the year and the company's revised guidance for revenue declines of 6 to 7% and company defined adjusted EBITDA declining 14 to 16% in FY 2014. The company also increased capex guidance to 13% of revenue over the next several years from our expectation of 10%. In our opinion, results were negatively impacted by animal rights campaigns against the company, stronger competitive offerings in the Orlando, Florida market, and delayed school closings in some markets this year.

The company is anticipated to carry out a cost saving program to help offset revenue declines as well as fund additional capex spend and fund stock buybacks in 2015. The heightened capex spend over the next few years will improve park attractions, but reduce free cash flow.

A summary of Moody's actions are as follows:

SeaWorld Parks and Entertainment, Inc

Corporate Family Rating, affirmed at B1

Probably of Default Rating, affirmed at B1-PD

Revolving credit facility maturing on April 2018, affirmed at Ba3 (LGD3)

1st lien term loan B-2 facility maturing May 2020, affirmed at Ba3 (LGD3)

Speculative Grade Liquidity Rating, affirmed SGL-2

Outlook: changed to stable from positive

SUMMARY RATING RATIONALE

SeaWorld's B1 (CFR) reflects the portfolio of 11 regional and destination theme parks and weak operating performance during 2014 that is expected to increase leverage from 4.4x as of Q2 2014 (incorporating Moody's standard adjustments) to almost 5x by the end of 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 efforts in California to ban the shows in that state. Despite weaker than anticipated performance, the company still generates meaningful annual attendance (approximately 23 million in the LTM period ending Q2 2014) and benefits from adequate cash flow generation to fund a significant ongoing capital program, dividends, and fund stock buy backs. The value of its portfolio of parks is also substantial and provides significant asset protection.

SeaWorld has a good liquidity position (as reflected in our SGL-2 rating) supported by sufficient cash ($63 million as of Q2 2014) and projected free cash flow to cover capital spending, required debt service, and dividends. We expect seasonal reliance on the $192.5 million revolver (undrawn at Q2 2014 except for $16 million of letters of credit). The revolver matures on the earlier of April 2018 or the 91st day prior to the maturity date of the senior notes (unrated).

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 for the life of the loan and the interest coverage ratio is set at 2.05x.

The 11% cash-pay notes have a make-whole call prior to 12/1/14 and is callable at 105.5% thereafter (declining to 102.75% on 12/1/15). The company may refinance the notes as the initial call date approaches which could lead to interest expense savings. A reduction or refinancing of the note with new secured debt could pressure the credit facility rating given the removal of subordinated debt in the capital structure.

The stable rating outlook reflects our expectation that SeaWorld will experience mid to high single digit revenue declines that will lead leverage to increase to almost 5x by the end of 2014. The company will have to contend with negative publicity and campaigns from animal activist, potential legislative actions that could impact operations, and improve the level of attractions at some parks.

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. A good liquidity position would also be necessary for an upgrade.

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. 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. The Ba3 credit facility rating could be lowered if the unsecured notes were reduced or refinanced with senior secured debt.

SeaWorld Parks & Entertainment, Inc.'s 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 SeaWorld Parks & Entertainment, Inc.'s core industry and believes SeaWorld Parks & Entertainment, Inc.'s 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.

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