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Rating Action:

Moody's assigns (P)B2 to Palace Entertainment; outlook stable

14 Feb 2011

First-time ratings

Madrid, February 14, 2011 -- Moody's Investors Service has today assigned a provisional (P)B2 corporate family rating (CFR) and probability-of-default rating (PDR) to Palace Entertainment Holdings, LLC ("Palace"). Concurrently, Moody's has assigned a provisional (P)B2 rating and Loss Given Default (LGD) Assessment of LGD4 to the company's proposed USD430 million worth of senior secured bonds due in 2017. The outlook for all the ratings is stable.

This is the first time that Moody's has assigned ratings to Palace. Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to Palace's proposed USD430 million senior secured notes. The definitive rating may differ from the provisional rating.

RATINGS RATIONALE

"Palace's (P)B2 CFR reflects the company's strong EBITDA margins and good operating cash flow generation from its sound portfolio of regional amusement parks, which is diversified in terms of geography and by type of park. Nevertheless, there is a certain degree of profitability concentration in the company's top three parks," says Iván Palacios, a Moody's Vice President-Senior Analyst and lead analyst for Palace.

"The rating also reflects Palace's relatively small size and scale compared with other rated peers as well as its high debt/EBITDA leverage and exposure to event risk due to its acquisitive strategy. In addition, its revenues are vulnerable to economic cycles and are highly seasonal," says Mr. Palacios.

"These concerns are mitigated by: (i) the lower risk profile and higher resilience to economic cycles of regional parks compared with destination parks; (ii) the company's track record of improvements in profitability through the successful turnaround of undermanaged parks; and (iii) its strong and experienced management team," adds Mr. Palacios.

Palace is a wholly owned affiliate of Parques Reunidos, the third-largest leisure park chain worldwide in terms of number of visitors after Walt Disney and Merlin, and generates approximately 37% of Parques Reunidos's revenues and 33% of the group's EBITDA. Ownership by Parques Reunidos leads to efficiencies in terms of economies of scale, global sourcing and best-practice benchmarking, but could also be detrimental to Palace's credit profile if it had to provide financial assistance to the parent, which also has a leveraged financial profile. The (P)B2 CFR assumes effective ring-fencing of the Palace restricted group from Parques Reunidos and no material cash leakage to the parent.

Palace plans to issue the USD430 million six-year senior secured bond and a USD100 million super senior RCF to refinance existing debt. Concurrently, the shareholder is to inject an additional USD65 million into the business. The provisional CFR, PDR and instrument ratings are contingent on the successful completion of the refinancing transaction.

The (P)B2 rating on Palace's USD430 million worth of senior secured notes is at the same level as its CFR, as it is the largest piece of debt in the company's capital structure. However, the USD100 million RCF ranks ahead of the USD430 million worth of notes by virtue of the intercreditor agreement, despite sharing the same collateral package on a first-ranking basis.

Palace's capital structure is its primary ratings driver. The company faces high financial risk, including leverage (as per Moody's standard adjustments, which include capitalised operating leases) of 6.0x as of the year ended 26 September 2010.

The stable outlook incorporates Moody's expectation that Palace will maintain leverage in the 5.5x-5.0x range over the rating horizon. This is based on an expected improvement in Palace's operating performance and selective acquisition activity in line with the company's strategy to turn around undermanaged parks. Moody's notes, however, that the rating is relatively weakly positioned within the rating category and there is limited tolerance for deviation from Moody's forecast for the company's operating performance.

Downward pressure on the rating could result from any of the following (all as per Moody's standard adjustments): (i) sustained negative FCF generation; (ii) sustained leverage significantly above 6x; and (iii) sustained EBITDA less capital expenditure coverage below 1x. An increase in leverage to fund distributions to the parent in the event of pressure at other group entities would also likely have negative rating implications. In addition, any concerns developing over liquidity could exert downward pressure on the rating.

Upward pressure on the rating could develop if Palace were to sustain leverage below 5x debt/EBITDA and an FCF/debt ratio of more than 5%, while maintaining a good liquidity position and a track record of conservative bolt-on acquisitions. Nevertheless, Moody's notes that a change in CFR may result in the introduction of notching for the senior secured notes rating.

The principal methodologies used in this rating were "Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations" published in December 2010, and "Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA" published in June 2009.

Moody's assigned Palace's ratings by evaluating factors that it 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 short to medium term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against those of other issuers both within and outside Palace's core industry and believes that Palace's ratings are comparable to those of other issuers with similar credit risk.

Headquartered in California, Palace Entertainment Holdings, LLC is an amusement parks operator in the US. Palace owns and operates a total of 40 parks including 21 family entertainment centres, twelve water parks, six theme parks and one animal park. Palace is an affiliate of Parques Reunidos Servicios Centrales S.A.U., a Spanish corporation, primarily controlled and indirectly majority owned by funds managed by Candover Partners Limited, a UK-based private equity firm. In the year ended 26 September 2010, the company reported sales of USD260 million and EBITDA (as reported by the company) of USD79.4 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Madrid
Ivan Palacios
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)B2 to Palace Entertainment; outlook stable
No Related Data.
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