Summary analysis — Merlin Entertainments S.a.r.l. ———————— 02-Jul-2012
CREDIT RATING: B+/Stable/— Country: Luxembourg
Primary SIC: Amusement and
Credit Rating History:
Local currency Foreign currency
23-May-2012 B+/— B+/—
15-Jul-2010 B/— B/—
The rating on Luxembourg-based Merlin Entertainments S.a.r.l. (Merlin) reflects Standard & Poor’s Ratings Services’ view of the group’s “highly leveraged” financial risk profile and its “fair” business risk profile.
Merlin’s high debt leverage, relatively high capital expenditure (capex), and significant operating lease liabilities underpin our view of the group’s financial risk profile as “highly leveraged”. Mitigating Merlin’s highly leveraged capital structure is our assessment of the group’s liquidity profile as “adequate,” which gains support from our view of the group’s fairly flexible capex. We understand that maintenance capex is about GBP25 million-GBP30 million per year, and that Merlin can cut expansionary and development capex quite quickly in the event of adverse market developments. Moreover, our projection of EBITDA interest coverage ratio at about 2.0x-2.5x is a further support.
We assess Merlin’s business profile as “fair,” because the group is the largest operator of theme parks and visitor attractions in Europe and the second-largest operator globally after The Walt Disney Co. (Disney; A/Stable/A-1). The visitor attractions industry’s notable characteristics, in our opinion, include its exposure to challenging discretionary consumer spending trends and heavy seasonality. High barriers to entry, combined with Merlin’s well-known brands, geographically diverse portfolio of indoor and outdoor attractions, growing proportion of revenues from all-year sites, strong earnings track record and resiliency to economic cycles, and industry-leading margins, offset these industry risks.
S&P base-case operating scenario
Overall, for the full-year 2012, we project double-digit growth in revenues and profitability, mainly driven by acquisitions and new openings. We anticipate flat like-for-like KPIs in 2012. We project revenues of about GBP1.1 billion and reported EBITDA of about GBP350 million (about GBP400 million after our adjustments) in December 2012. Our base-case scenario assumes a broadly stable performance in the theme park sector, with about 30% top-line growth in the “midway” attractions (mainly driven by the new openings and the Living and Leisure Australia acquisition). Our base-case scenario also assumes over 20% revenue growth in the Legoland business, mainly thanks to the full-year contribution of Legoland Florida, which opened in October 2011. In 2013 we are projecting further top line and profitability growth, mainly driven by new openings and investments.
We are factoring in sizable capex (about GBP160 million in 2012, in addition to about GBP160-GBP170 million for the LLA acquisition and related investments), and relatively minor year-on-year working capital changes. We do not expect any dividend payments in 2012 and 2013. Overall we expect limited (though positive and growing) free cash flow generation (about GBP30 million in 2012).
Group revenues and EBITDA in 2011 (ended Dec. 31, 2011) were about 16% up on 2010. Spend per head was up from 2010 (admissions +2.5%, retail +5.5%, F&B +2.8%), while acquisitions and new openings were the main growth drivers.
S&P base-case cash flow and capital-structure scenario Merlin’s highly leveraged financial position is the primary factor behind the rating, with lease-adjusted net debt to EBITDA of 5.3x at year-end 2011. This represents a material improvement from the 5.7x ratio in December 2010 and 7.3x ratio in 2009.
In the short term we believe that further leverage reduction depends mainly on future EBITDA growth, given the lack of debt amortization requirements and limited free operating cash flow (FOCF) generation due to Merlin’s expansion program. Sales and EBITDA growth would enable the group to generate positive FOCF after maintenance capex, but we anticipate that the group’s ambitious development and expansion program will limit its discretionary cash flow generation in the short term.
Under our base-case financial forecast, we assume that Merlin will be able to maintain adjusted debt to EBITDA below 5.5x (estimated at about 5.0x in December 2012) and adjusted EBITDA interest coverage above 2.0x (estimated at 2.4x in 2012) over the near term.
We assess Merlin’s liquidity profile as “adequate” under our criteria. We calculate that the group’s sources of liquidity, including cash and the availability of a revolving credit facility (RCF), exceed its uses by 1.2x or more over the next 12 months.
The following factors underpin our assessment of “adequate” liquidity:
— We anticipate that net sources of cash will remain positive, even if EBITDA declines by 20%.
— We project adequate headroom under the maintenance financial covenants on the bank debt documentation. These covenants were reset in mid-2011 as part of a process to extend debt maturities and improve operating flexibility.
— We understand that there are no meaningful debt maturities or debt amortization requirements before 2017.
— We believe that the group could absorb low-probability, high-impact shocks because of its limited maintenance capex.
Our assessment of Merlin’s liquidity sources in the 12 months to Dec. 31, 2012, under the scenario outlined above, includes:
— Access to cash balances of about GBP60 million as of Dec. 31, 2011.
— Ample availability (about GBP130 million as of December 2011) within its GBP138.1 million revolving credit facility (RCF) maturing in 2017.
— Substantial operating cash flow generation. We estimate that this could reach about GBP190 million in financial 2012.
In our opinion, liquidity and cash flow generation is sufficient to fund capex (up to about GBP165 million). Moreover, as part of our liquidity assessment, we assume that the LLA acquisition and related fees and investments are funded through drawings under the new, about GBP175 million equivalent, acquisition facility.
The issue rating on Merlin’s senior secured credit facility is ‘BB-‘, one notch above the corporate credit rating. The recovery rating on this facility is ‘2’, indicating our expectation of substantial (70%-90%) recovery prospects for debtholders in the event of a payment default.
Our issue and recovery ratings reflect our valuation of Merlin as a going concern, underpinned by our view of the group’s strong market share and the relatively high barriers to entry typical of the visitor attractions sector.
Our issue and recovery ratings also reflect our view of the comprehensive security and guarantee package that the group provides to lenders. In addition, the ratings take into account our view of the bank-debt-like nature of the rated facility. This characteristic, through the presence of maintenance covenants and a cash flow sweep mechanism, could in our view lead to a lower amount of debt and less value destruction by the time of our hypothetical default in 2017.
An updated recovery report will be published shortly on RatingsDirect on the Global Credit Portal.
The stable outlook reflects our view that Merlin’s improving revenues and profitability over the coming year will enable it to sustain its enhanced financial metrics. We base this view on the full-year contributions of recent acquisitions and new site openings, and on the group’s resilience to ongoing pressure on consumer spending. As a result, we believe EBITDA will increase further to about GBP350 million in 2012, enabling the group to reduce its adjusted-debt-to-EBITDA ratio to close to 5.0x, and adjusted EBITDA interest coverage toward 2.5x. The stable outlook also reflects our opinion that Merlin will maintain what we consider to be “adequate” liquidity, despite its significant investment program.
Rating pressure could arise if adverse operating developments or signs of a looser financial policy were to affect Merlin’s improving financial metrics. Specifically, pressure could arise if adjusted debt to EBITDA were to exceed 5.5x and adjusted EBITDA interest coverage were to decline to less than 2.0x, or if we were to reassess the group’s liquidity as “less than adequate”.
Rating upside, in our opinion, is limited at this stage, even if Merlin’s credit measures were to improve, due to our view of the group’s aggressive financial policy of focusing on external growth.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
— 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
— Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009