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Rating Action:

Moody's upgrades Merlin Entertainments to Ba3; stable outlook

31 Mar 2014

London, 31 March 2014 -- Moody's Investors Service has today upgraded to Ba3 from B1 the corporate family rating (CFR) and to B1-PD from B2-PD probability of default rating (PDR) of Merlin Entertainments (Merlin), which is the ultimate holding company for Merlin Entertainments group and its operating subsidiaries. The rating of the credit facilities has also been upgraded to Ba3 from B1. The outlook is stable.

At the same time, Moody's has re-assigned the Group CFR at Merlin Entertainments PLC, which is the ultimate holding company for Merlin Entertainments group and its operating subsidiaries; and withdrawn the previous CFR at Merlin Entertainments S.àr.l, as that entity's shares were transferred to Merlin Entertainments PLC as part of the IPO process. In addition, the rating of the credit facilities has been withdrawn at Merlin Entertainments Group Luxembourg 2 S.àr.l. and re-assigned at Merlin Entertainments PLC, which has become the new parent obligor for those facilities.

"The upgrade reflects the combination of Merlin's successful IPO launch in October 2013, the proceeds of which were used largely towards debt reduction, as well as strong underlying earnings growth in 2013, which has improved metrics to a level within our previous guidance for an upgrade", says Richard Morawetz, a Moody's Vice President - Senior Credit Officer and lead analyst for Merlin.

RATINGS RATIONALE

In October 2013, the company listed on the London Stock Exchange with a 33% free float, for which it obtained net proceeds of GBP194 million, used largely for debt reduction. Reported net debt fell to GBP1 billion from GBP1.28 billion in 2012. In addition, Merlin reported underlying EBITDA growth of 12.8% at GBP390 million (i.e., before mainly IPO-related costs), with all three operating groups reporting double-digit EBITDA growth. The particularly strong growth of 18.7% at the Midway Attractions benefited from a revival in 2013 after the negative effects for Merlin of the London Olympic Games in 2012. As a result of both of these developments, Moody's estimates the company's gross adjusted leverage, before IPO-related costs, to be about 4.7x, which is within previous guidance for an upgrade. Moody's further notes the high cash balance at FYE2013, which represents additional financial flexibility contributing to the solid rating positioning. Moody's also believes that the trajectory of this metric will mainly depend on the company's own financial policies. The company has stated its intention to initiate a dividend policy of 35%-40% of net income (based on a normalised expected tax rate). In 2013 the reduction in net debt also benefited from a scaling back of acquisition spend; although the company has also indicated that it will continue to pursue acquisitions where suitable.

The company's liquidity is deemed strong, with a cash balance of GBP264 million as of FYE2013, and an undrawn revolving credit facility (RCF) of GBP150 million. After refinancing its bank facilities in June 2013, the company has no significant debt maturities prior to the RCF and term loans maturing in 2018 and 2019. The term loans and RCF contain the same financial covenants for leverage and interest coverage, for which headroom remained strong as of December 2013. The term loans are multi-currency (GBP, EUR, USD and AUD), to largely mirror the company's earnings structure by currency.

The CFR of Ba3 reflects Merlin's strong position as a global operator of theme parks and attractions, with operations in 22 countries and just under 60 million visitors in 2013. While its size remains small relative to companies in the broader services industry, with a still fairly leveraged capital structure, Merlin is the second-largest operator of visitor attractions globally after The Walt Disney Company (A2 stable). It owns internationally recognised brand names including Madame Tussauds, The Dungeons, Alton Towers, LEGOLAND, SEA LIFE, Gardaland and the London Eye. The company's mixture of theme parks and 'midway' attractions (i.e., city centre or resort-based attractions with a 1-2 hour dwell time), as well as indoor and outdoor activities (the latter accounting for approximately 42% and 58% of revenues, respectively), has proven fairly resilient to external shocks in recent years. Moody's nevertheless believes that the nature of the company's activities will leave it exposed to risk factors such as the weather or exceptional events such as the London Olympics, both of which dampened demand in 2012.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company will likely continue to post largely stable earnings growth and to generate free cash flows, but will use these sporadically to continue its growth ambitions, as it has done in recent years. As such, Moody's does not anticipate any significant change in metrics over the medium term, barring any further changes to the capital structure.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade would become likely if a further deleveraging trend develops, with adjusted debt/EBITDA moving below 4.0x. Conversely, a more aggressive financial policy, or a significant industry downturn, neither of which Moody's expects at this time, could lead to negative ratings pressure if gross leverage were to rise sustainably beyond 5.0x, taking into consideration that excess cash may mitigate any increase in gross leverage. Although currently not expected, the emergence of liquidity risks could also exert downward pressure on the rating.

Merlin Entertainments PLC'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 Merlin Entertainments PLC's core industry and believes Merlin Entertainments PLC'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.

Based in Dorset, the UK, Merlin Entertainments Group is the largest European, and second-largest global, operator of visitor attractions in terms of attendance. The company reported about GBP1.2 billion in revenues and underlying EBITDA of GBP390 million for year-end 2013, and attracted nearly 60 million visitors to its 99 locations in that year. The company's owners include Kirkbi, a Danish investment fund (29.9%); two private equity partners (Blackstone (21.1%) and CVC Capital Partners (11.6%); and management (4.4%), with the remainder as free float.

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.

Richard Morawetz
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Merlin Entertainments to Ba3; stable outlook
No Related Data.
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