July 4, 2019 / 3:59 PM / 3 months ago

Merlin at risk of being further junked

LONDON (IFR) - Moody’s threatened to push Merlin Entertainment further into junk on Thursday, saying the company’s Ba2 rating is at risk from an expected increase in leverage from its £5.91bn buyout.

UK theme park and attraction operator Merlin is being acquired by an investment vehicle of Lego’s founding family and private equity firm Blackstone.

The purchase is being backed by a loan financing arranged by Bank of America Merrill Lynch and Deutsche Bank, who will provide the consortium a total of £3.8bn equivalent of debt - mostly in term loans.

Merlin’s debt levels are around £1.3bn, according to Moody’s. The ratings agency expects the acquisition debt to increase Merlin’s leverage “well above” the downgrade trigger of 5x - from 3.9x in 2018.

“Moody’s expects it to be difficult for the company to achieve significant Ebitda growth in 2019 because of strong year-earlier comparables and rising payroll expenses,” analysts wrote.

As a result, Moody’s expects the group deleveraging pace to be lower and to only start in 2020.

Merlin has one outstanding euro bond: a €700m 2.750% senior note due 2022.

That bond includes a change of control clause, which allows bondholders to request full repayment at 101, analysts said.

“Moody’s understands that the buyer secured sufficient funds to cover full amount of the notes and expects to withdraw the notes’ ratings should it be fully repaid,” analysts wrote.

“However, if the existing notes remain in the new capital structure, their credit quality will deteriorate due to the expected higher debt quantum post-acquisition.”

It seems like investors expect the notes to be repaid. Merlin’s 2022s were seen bid at 105 Wednesday afternoon, up from 104 the day prior, according to Tradeweb.

Merlin also carries a BB rating from S&P, which was put on negative watch on July 2.

Reporting by Eleanor Duncan, editing by Helene Durand and Sudip Roy

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