Does SeaWorld Have A Debt Problem?

Aug.27.14 | About: SeaWorld Entertainment (SEAS)

Summary

SeaWorld operates with a lot of debt, nearly as much as its market cap.

However, most of the debt is in a low-interest credit facility that doesn't mature until 2020.

Given SeaWorld's earnings capability, I don't see any problem with its debt load.

A few weeks ago, I profiled SeaWorld (NYSE:SEAS), noting that its operating performance had made shares appear cheap, given earnings growth forecasts. However, one nitpick investors have against SEAS is the fact that it operates with a lot of debt. Indeed, $1.7 billion in debt is a lot for a company with a $1.8 billion market cap. However, that doesn't mean SEAS necessarily has a debt problem. In this article, we'll take a quick look at SEAS' debt issuances and try and understand if we should be concerned.

To begin, I pulled all data for this article from the second quarter 10-Q linked above. Below, you'll see a chart constructed with that data showing SEAS' long-term debt and operating leases for various periods.

Click to enlarge

This chart shows that debt and operating leases are actually reasonably small over the next several years. We see negligible payments due in 2014, but the next couple of years after that, we see SEAS on the hook for over $300 million in payments. A huge dip occurs for the next period, but more than five years out, we see the lion's share of SEAS indebtedness. At first glance, SEAS' payments due are quite manageable, given the amount of time that needs to elapse before any large amounts of debt come due.

So why do I include operating leases in a debt discussion? Operating leases are a form of debt that don't show up on the balance sheet. In essence, operating leases are a way to finance real estate and other hard assets without owning it, which for SEAS would mean taking on debt to buy it. This off-balance sheet financing isn't true debt, but once we look past semantics, it is virtually the same thing; it is required payments for space needed to run the business. In other words, it's off-balance sheet debt, and should be included in the discussion. Thankfully, SEAS' operating leases are pretty small, so it isn't a big piece of the pie here.

Much of SEAS' indebtedness is a credit facility it has taken on that matures in 2020; this is why we see a big spike in debt payments due more than five years out. In addition, the other large piece of debt we see is in the second bucket, a block of notes that mature in 2016 and are currently outstanding at $260 million.

The credit facility is cheap; it's based upon LIBOR or the Fed Funds rate, plus a small number of basis points depending on certain circumstances. This debt is cheap to service, and the other advantage it has with this debt is that SEAS can easily refinance this when the time comes. Credit facilities are great for both the borrower and the lender; the lender makes a certain amount of funds available, and the borrower takes them as needed. SEAS still has ~$200 million unused on its credit facility, so I'm not concerned in the least with it. The balloon payment that is due in 2020 when the facility expires is far less scary when viewed in this light.

The notes that are due in 2016 are a thorn in the side of SEAS right now. This debt was issued at a whopping 13.5% interest in 2009, but in 2012, the interest rate on these notes was reduced to "only" 11%. Now, I'm never in favor of a company taking on such expensive debt, but SEAS has a couple of things going for it with this debt. First, it can redeem it any time it pleases, subject to certain premiums that may need to be paid. In fact, after its IPO, SEAS redeemed $140 million of these notes with proceeds from the offering. SEAS can still redeem these notes for face value through 2014, and can redeem them after 2015 begins for a small premium.

I sincerely hope SEAS is working on a plan to redeem these notes and replace the amount needed with a credit facility or some equivalent financing. These notes are brutally expensive, and given SEAS' financial condition, there is no reason to be paying so much to borrow money. Redeeming the block of notes after the IPO was a step in the right direction, but there is still some work to do.

Overall, I don't think SEAS has a debt problem. Yes, the overall number looks huge, but when you take time to fully understand what SEAS is on the hook for, it really is quite manageable. The fact that most of its debt is in a credit facility is great, as that is the easiest form of debt to refinance once it matures; usually, the lender will want to renew anyway as long as the borrower is current. It is also very cheap as a form of debt. I do wish SEAS would redeem the remaining notes that are outstanding, as they are ridiculously expensive, but even if it doesn't, the payment due in 2016 is small enough for SEAS to handle. So in short, SEAS does not have a debt problem, and shareholders should not be worried.

Disclosure: The author is long SEAS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.