MOODY'S ASSIGNS B1 TO GTD SENIOR SUBORDINATED NOTES OF VAIL RESORTS, INC. AND Ba1 TO GTD UNSECURED CREDIT FACILITY OF SUBSIDIARY
Moody's Investors Service assigned a B1 rating to Vail Resorts, Inc's. proposed $150 million of senior subordinated notes, due 2009, and a Ba1 to the $450 million unsecured revolving credit facility, due 2002, available to its subsidiary. The senior implied rating is Ba2 and the outlook is stable. Net proceeds from the bond offering will be used primarily for the repayment of borrowings under the revolving credit facility.
The ratings reflect Vail's moderate leverage and significant equity base; its solid coverage of interest obligations with cash flow; its high quality, well located resorts; its strong brand names; its low real estate development exposure; and the significant competitive barriers to entry in the ski industry.
However, the ratings also recognize the company's aggressive acquisition strategy; its lack of geographic diversification; its modest returns on its assets; and industry risks including dependence on weather, exposure to economic recession and seasonality, and the capital intensive nature of the ski resort business.
The stable outlook reflects Moody's expectation that the company's operating results should improve following its weak financial performance during the 1998/1999 ski season compared with prior seasons due to uncommon snowfall.
The company currently owns and operates four high-end ski resorts in Colorado that include Vail, Breckenridge, Keystone, and Beaver Creek. The company's four resorts are located within 50 miles from one another, which increases its exposure to the risk of adverse weather and regional economic downturns. This weakness is apparent in the company's performance for its most recent ski season, which experienced one of the worst snowfall seasons recorded in the last 35 years. Primarily because of poor weather, the company expects that its resort EBITDA (earnings before interest, taxes, depreciation and amortization) will fall to approximately $101 million from $119 million for the nine month period ended April 1999, versus April 1998, respectively. As a result, Moody's estimates a 20% to 25% drop in fiscal year-end resort EBITDA to about $80 to $85 million from $106 million in the prior year.
Mitigating the company's minimal geographic diversity is the high quality and destination nature of its resorts. Although the company caters to visitors from the local feeder markets such as Denver, a majority of Vail's guests are affluent and family-oriented domestic and international vacationers. In addition, easy access to the company's resorts is crucial. The Vail/Eagle Airport accommodates non-stop jet service from 12 U.S. cities during the ski season, and all of its resorts are within a reasonable drive on Interstate 70, a major four lane highway, from the Denver International Airport.
Despite poor snowfall and the company's weaker operating results compared with its prior season, pro-forma for the bond offering and for its $50 million planned acquisition of the Grand Teton Lodge Company, Vail's debt-to-capital is moderate at 45% (pro-forma debt is $380 million and equity is $472 million) and its estimated fiscal 1999 coverage of interest obligations with EBITA (earnings before interest, taxes, and amortization) is sufficient at 1.8 times. Moody's expects that the company's operating results and credit measurements should improve following its weak financial performance during the 1998/1999 ski season due to uncommon snowfall. The company has sufficient liquidity through the availability of its credit facility, which would have about $95 million of borrowing capacity following the note offering and purchase of Grand Teton.
Nevertheless, Moody's is cautious about the company's active history of acquisitions and its plans to continue to make acquisitions. The company purchased Breckenridge and Keystone in 1997, bought five hotels and numerous restaurants and retail centers in the past year and a half, and should complete the Grand Teton acquisition this summer. Although Vail to date has been a prudent acquirer of high quality assets at reasonable multiples of cash flow and has used equity to partly fund acquisitions, a large drop in the company's share price over the past year raises some uncertainty as to whether the company would be able or willing to raise equity or use equity to fund future acquisitions. Consequently, the potential for debt financed acquisitions and increasing leverage exists.
The company's real estate exposure is low. At January 31, 1999, its real estate held for sale had a book value of $155, compared to total assets of $1.0 billion. While real estate sales are highly vulnerable to economic recessions, the company's cash flow from its real estate sales is modest, and has ranged from $5 million to $10 million over the past three years, or about 6% to 10% of consolidated cash flow. Vail manages its real estate ventures to minimize its risk by taking part in third party development contracts.
Although the company's leverage and interest coverage measurements are healthy, its return on assets is modest. Excluding the fiscal 1999 results because of abnormal weather, the company's return on its assets pro-forma for its acquisitions, as measured by EBITA-to-average assets, was 9.7% and 8.9%, respectively, in fiscal 1998 and 1997. Despite a modest ROA and $200 million of intangible assets, even in a downside scenario the notes and revolving credit facility should be fully covered by the company's fixed assets.
Compounding the effects of the poor weather results was a price "war" in the Colorado ski market that affected Breckenridge and Keystone. Season passes that are traditionally sold to avid skiers for $600-$700 were slashed to $200. Despite this large reduction in price, the company estimated that its number of season-passes sold increased by almost five-fold, more than offsetting the price drop as well as lost ticket sales from season pass holders that otherwise would have purchased daily lift tickets.
Over the medium term, Moody's believes that most ski resorts must make heavy capital investments to stay competitive. With the number of North American skier visits flat over the last 15 years, resorts must compete for skiers who are increasingly demanding state-of-the-art lifts and snowmaking equipment. Over the past three calendar years, Vail has spent about $147 million on internal growth projects such as: a 30% terrain expansion at Beaver Creek; construction of seven high-speed four-passenger chairlifts; 20 new restaurants; and three private on-mountain clubs. Based on the company's plans to spend about $60 million per year over the next several years on capital expenditures, Moody's expects that it should be able to meet most of its capital needs with free cash flow.
The notes, which will be issued at the holding company level, will be jointly and severally guaranteed on an unsecured, senior subordinated basis by substantially all of the company's subsidiaries. The indenture limits the incurrence of additional indebtedness by a 2.0 times consolidated interest coverage ratio. However, there are substantial exclusions, including the incurrence of up to the greater of $450 million in bank debt or 3.5 times consolidated resort EBITDA, as well as $50 million of other debt. In addition, the indenture limits restricted payments to 50% of net income beginning for the period after the offering, with the exception of up to $15 million of restricted payments.
The revolving credit facility, which will be available to Vail Corporation, the subsidiary that owns the Vail resort, will be unsecured and guaranteed on an unsecured basis by substantially all of Vail Resorts, Inc.'s subsidiaries. The credit facility will also have a negative pledge on any new liens against substantially all assets.
Vail Resorts, Inc. operates the Colorado mountain resorts of Vail, Breckenridge, Keystone, and Beaver Creek.
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