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Rating Action:

Moody's changes Palace Entertainment rating outlook to Negative from Stable; existing ratings affirmed

05 Mar 2014

New York, March 05, 2014 -- Moody's Investors Service (Moody's) changed the rating outlook for Palace Entertainment Holdings, LLC (Palace) to negative from stable and affirmed the existing ratings including the company's B2 Corporate Family Rating (CFR). The change in rating outlook reflects Moody's concern that a recovery in EBITDA in 2014 following weaker than anticipated performance during fiscal year 2013 compared to our expectations and other rated regional amusement park operators might be insufficient to reduce debt-to-EBITDA leverage from 6.8x as of Q1 2014 to a level appropriate for the current ratings.

Moody's projects that Palace's debt-to-EBITDA leverage will decrease from its current level based on anticipated better weather conditions during the upcoming season, price increases, and additional capex spend on new rides and attractions. However, another year of weak performance due to cool or rainy weather, competitive conditions, or reduced discretionary consumer spending would likely result in a downgrade of the ratings if leverage is not reduced.

A summary of Moody's rating actions are as follows:

Palace Entertainment Holdings, LLC

..Corporate Family Rating Affirmed B2

..Probability of Default Rating Affirmed B2-PD

..$430 million senior secured note due April 2017 affirmed B2 (LGD4 - 57%)

Outlook: changed to negative from stable

RATINGS RATIONALE

Palace's B2 CFR reflects the high leverage level for the existing rating, weak free cash flow generated from the mid- sized regional amusement/water park portfolio, exposure to cyclical discretionary consumer spending, and event risks related to acquisitions and ownership by Parques Reunidos Servicos Centrales S.A.U. (PQR). Palace's total attendance (approximately 5.8 million annually) and its parks are smaller than rated U.S. peers, although a long-standing management team and ownership by PQR allows for sharing of best practices and consolidated purchasing power. The industry is mature, seasonal, and requires significant re-investment to maintain a competitive service offering. Attendance is exposed to competition from a wide variety of other leisure and entertainment activities as well as cyclical discretionary consumer spending. The company is especially sensitive to weather conditions due to its composition of theme parks, water parks and family entertainment centers that are impacted by rain or cooler than normal weather during peak operating periods. Moody's expects that Palace will utilize any excess cash for acquisitions and projects modest attendance and EBITDA growth at Palace's existing parks in 2014 that will result in modest deleveraging from current levels. If the company appears unlikely to reduce leverage during the 2014 operating season to at least the low 6x range, the ratings would likely be downgraded. Palace has an adequate liquidity position, but Moody's expects revolver draws in the spring of 2014 (during its peak working capital usage period) to lead to a higher leverage level in the next two quarters. The 2017 bullet maturity on its only outstanding debt aside from the revolver increases refinancing risk and lessens flexibility to repay debt.

Palace is financed separately from PQR and the company's debt does not cross default to PQR's debt. As a result, Moody's evaluates Palace separately but incorporate into the company's ratings the risks related to its ownership by PQR. PQR's operations have been pressured by weak economic conditions in Europe, and it has implemented cost savings in an effort to mitigate revenue softness. Moody's believes that PQR could seek to extract cash from Palace to support operations as PQR is highly leveraged and may require a covenant amendment or equity cure. PQR's control by private equity investors creates event risks, including the potential that Palace could be sold to raise cash.

Palace has an adequate liquidity position with existing cash (approximately $20 million as of 12/22/13) and $10 million drawn under the $120 million revolver providing sufficient capacity to absorb fluctuations in the company's highly seasonal cash flow generation. The company does not have any required debt principal payments until April 2017.

Moody's projects that Palace will generate breakeven free cash flow over the next 12 months after interest, working capital and an estimated $34 million of capital spending, although free cash flow will be dependent on weather conditions during the 2014 summer operating season. Palace does not expect to have meaningful tax obligations for the next several years. Moody's believes the company's seasonal revolver borrowings will increase through the spring (prior to the opening of the majority of its parks and following the semi- annual $19 million interest payment in April). Cash flow generated during the operating season is expected to be directed to paying down the revolver in full by the end of the operating season. Reliance on the revolver would likely increase if Palace completes an acquisition.

The $120 million unrated revolver matures in February 2016. Borrowings on the facility are subject to a clean down provision that requires the revolver to be paid down below $50 million for 20 consecutive days during each calendar year. This limits the ongoing effective capacity of the revolver, although Moody's does not anticipate this to constrain Palace's liquidity unless it upstreams money to PQR or executes a large acquisition funded with revolver borrowings. Moody's expects the Palace will maintain considerable cushion within the revolver's 2.0x maximum senior super priority leverage covenant ratio (based only on revolver debt).

The negative ratings outlook incorporates the company's high leverage of 6.8x that weakly positions the company at the existing rating. Moody's anticipates that revenue and EBITDA growth due to additional rides and attractions, price increases, and better weather will lead to reduced leverage in 2014, but is concerned the decline may be insufficient to maintain the existing rating.

Operating performance in 2014 that Moody's anticipates will lead to leverage remaining above 6.25x, EBITDA less capex to interest in a 1x or lower range, or flat to negative free cash flow on a ongoing basis would likely lead to a downgrade in the rating. Acquisitions that lead to higher leverage or weaken Palace's liquidity position could also result in a downgrade. Sizable cash distributions to PQR, or other leveraging actions by PQR or its private equity owners would also lead to downward rating pressure.

An increase in the size of the senior secured first priority revolver could lead to a downgrade of the $430 million notes given the revolver's seniority in the capital structure.

An upgrade is not expected at this time, but could occur if Palace sustains debt-to-EBITDA leverage below 5x and free cash flow-to-debt of at least 5% factoring in potential transactions related to PQR and private equity owners. Palace would also need to maintain a good liquidity position with sufficient cash and revolver capacity to manage seasonal cash flow needs, and an expected ability to fund or refinance the 2017 note maturity.

Palace Entertainment Holdings, LLC'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 Palace Entertainment Holdings, LLC's core industry and believes Palace Entertainment Holdings, LLC'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 this methodology.

Palace Entertainment Holdings, LLC (Palace), headquartered in Newport Beach, CA, is an operator of 6 theme parks (42% LTM 9/22/13 revenue), 10 water parks (31%), 20 family entertainment centers (FECs; 19%), and 1 animal park (7%) with operations in eleven states in the U.S. Palace is wholly owned by Madrid-based Parques Reunidos Servicios Centrales S.A.U. (PQR), which operates leisure parks in Europe (and one park in Argentina). PQR is controlled by Arle Capital Partners Limited (Arle; formerly Candover Partners Limited) a UK-based private equity firm. Palace's approximate $267 million of revenue LTM through September 2013 was roughly 38% of PQR's consolidated group total.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Van den Bosch
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Palace Entertainment rating outlook to Negative from Stable; existing ratings affirmed
No Related Data.
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