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Six Flag's (NYSE:SIX) debt currently trades with YTM's in the 10.5% range and in fact Capital Group LLC is still bullish on select issues. 9.75% and 9.625% secured notes due 2013 and 2014 currently have CCC ratings and we believe are bolstered by positive sentiment regarding the company's common shares. If the common shares are rising, and the bull story is taking hold for the equity, then it just means there's more cushion defending the company's high-yielding senior notes.

What's interesting is the amount of negativity which has been assigned to Six Flags. The company recently divested seven parks in its bid to realign operations in order to service debt. Despite total proceeds coming in at $312m vs. the $710m forecast by Capital Group research, the common shares still jumped on the news. Note that this was by selling the company's worst properties. They still have another ~23 properties, which are worth far more. Six Flag's Magic Mountain alone has said to be worth well over $200m. (this was at first to be sold, but in the end was spared, estimate was a casual observation in a Jim Cramer/SIX interview, see below)

The company's turn-around for 2007 looks to be on track, and if this continues, common shares should see further strength while high yielding senior notes could increasingly look like a steal.

The company said on a conference call that, so far, group bookings for the 2007 season were up 34 percent over last year and it had sold 50 percent more season passes than it ever had at this point in the season before.

Even Cramer has been in on the action, making it a top pick and interviewing the company's management in early January. In the interview the CEO says further good things about 2007. Of course this video needs to be taken with a grain of salt, as both Cramer and the CEO seem a bit too one-sided.

Still, Capital Group believes the most important variable going forward is attendance growth and forecasts 8% and 5% growth for 2007 and 2008 in the company's research models. Given that SIX already sees a 34% jump in bookings for 2007, these estimates seem undemanding. Thus we have a positive outlook on the company, even using estimates which are very attainable.

Again though, while the stock is the most accessible to retail investors, and could have a bright future, we agree with Capital Group that for those with the means, the senior notes outlined above are the true gems. While the extent of bullishness regarding the company's turn-around may be a bit overdone, it will take even that much more bad news to wipe out shareholders completely, and then start eating into the bondholders' share of SIX's pie. Overall enterprise value for SIX stands at about $3bn+ with about $540 coming from Equity and then another $270m cushion coming from preferred shares. EBITDA/Int Expense coverage is expected to be at about 1.5x in 2007, improving towards 2x in 2008 with Total Debt/EBITDA at around 8x.

Also, as a final note, bondholders are protected from a takeover by decent make-whole provisions at about 104% in the event of a change in control within the next few years. Common shares trade at about 13.3x 2006, 9x 2008 EBITDA according to Capital Group and are rated as Fair Value.

Disclosure: The author does not own any of SIX's securities.

Source: Six Flags' Shares Are Alright, But 10.5% Notes Are the True Gems