S&P Global Ratings raised its issuer credit rating on Alterra Mountain Co. to ‘B+’ from ‘B’ due to its improving leverage.
S&P said it believes Alterra Mountain Co. will be able to sustain total leverage well below 6x even though S&P’S baseline assumption is for the U.S. economy to enter a shallow recession in early 2023.
Operating performance over the course of the 2021/22 ski season exceeded S&P’S expectations for skier visitation, revenue and EBITDA. S&P expects Alterra to report S&P Global Ratings-adjusted debt to EBITDA of approximately 5x for fiscal year 2022, ended July 31.
S&P also raised its issue-level rating on the company’s secured credit facility one notch to ‘B+’ from ‘B’, in line with the higher issuer credit rating, and revised our recovery rating to ‘3’ from ‘4’.
The stable outlook indicates S&P’s expectation for Alterra to maintain total leverage below 6x for the next few years, even if a severe weather event results in limited snowfall and visitation. Although the company’s high cash balances reduce the risk of increased leverage from debt-financed mergers and acquisitions, rating upside is constrained by S&P’s view of Alterra’s controlling owners, financial sponsor KSL Capital Partners and Henry Crown & Co., which could entertain a more aggressive strategy and corporate decision-making that prioritizes the interests of controlling owners to focus on maximizing shareholder returns.
S&P said in its analysis:
“The upgrade to ‘B+’ reflects our expectation that Alterra will sustain leverage of around 5x or lower in fiscal 2023 even if an economic recession within the United States reduces resort visitation and spending. In our updated base case, we forecast skier visitation and revenue will continue to grow following a strong 2021-2022 ski season that resulted in revenue growth of 55 percent to 60 percent in fiscal 2022, ended July. We expect both skier visitation and revenue will grow in the low- to mid-single-digit percent area in 2023. Although we expect the company to increase the price of its pass products in line with inflation, we believe that effective ticket price (ETP) growth will be limited as Alterra drives a higher percentage of visitation via its pass products. Higher visitation from Ikon passes drives down ETP as passes are sold at a discount prior to the start of the season compared to same-day ticket purchases. We believe that EBITDA margin will modestly compress in 2023 to the 29 percent to 30 percent range. Ski operators have experienced increased costs most notably for labor, as the companies compete for seasonal employees. While we believe that wage pressure has subsided compared to 2021 and 2022, we believe the company will increase staffing levels ahead of the 2022/23 ski season in order to maintain service levels in the face of higher visitation. As a result, we expect Alterra to maintain S&P Global Ratings-adjusted leverage of approximately 5x through fiscal 2023, lower than its 2019 adjusted leverage, despite approximately $650 million of incremental term loan B issued over the course of the pandemic. Visitation at Alterra mountain resorts remained elevated compared to pre-pandemic levels during the 2021-2022 ski season even as other forms of entertainment reopened following the relaxation of COVID-related constraints. We estimate that skier visitation across Alterra’s portfolio of resorts increased approximately 20 percent during the 2021-2022 ski season. Because of heightened demand, we believe that effective ticket prices remained at historically high levels and approximately in line with 2021 levels, despite a significant increase in the company’s Ikon pass base. Additionally, a return to full operations for its food and beverage operations and CMH heli-skiing segment contributed to a 66 percent increase in revenue through the first three quarters of fiscal 2022, ended in July.
“In September, S&P Global economists downwardly revised our base case forecast for U.S. GDP and consumer discretionary spending in 2022 and 2023 and forecast that the U.S. economy will fall into a recession beginning in the first half of 2023 as recent indicators now show cracks in the foundation as the U.S. economy heads into 2023, as rising prices and interest rates eat away at household purchasing power. We believe that Alterra could be somewhat insulated from declines in discretionary spending in 2023. Alterra has significantly expanded its Ikon pass base since the start of the pandemic and because of the ski industry’s typically high-income demographic, declines in pass sales and skier visitation would be more resilient over the course of a recession.
“We expect Alterra to fund increased CAPEX and M&A through cash on its balance sheet.bWhile we originally expected the company to use some of its excess cash to pay down debt, we now expect the company to maintain its high cash balances to make tuck-in acquisitions and reinvest in its asset base in anticipation of continued increased skier visitation. As of April 30, 2022, Alterra reported $1.3 billion of cash on its balance sheet, substantially higher than what the company carried in years preceding the pandemic. We expect Alterra to end fiscal 2022 with $1.0 billion to $1.1 billion of cash on its balance sheet, despite significantly increased CAPEX and modest M&A activity in the second and third quarters. Alterra completes most of its capital investment programs over the course of the summer and ahead of the North American ski season. Furthermore, we forecast that Alterra will be able to fund continued elevated CAPEX spending in 2023 and 2024 through free operating cash flow (FOCF) generation. We believe that Alterra will maintain elevated levels of cash over the next 12 months for bolt-on acquisitions and to increase its flexibility for M&A without needing incremental debt financing.
“Alterra’s attendance is vulnerable to declines in consumer discretionary spending. Alterra is vulnerable to declines in consumer discretionary spending, which can reduce the company’s revenue during periods of economic weakness. Given that mountain resort activities often involve an above-average level of daily leisure spending, compared with more value-oriented alternatives, and our economists’ belief the U.S. will enter a recession within the next 12 months, the company’s attendance could decline if consumers pull back on their travel and leisure spending or choose less-expensive alternative entertainment options.
“Alterra’s operating performance can fluctuate with weather conditions. Alterra generates approximately 80 percent of its revenue and more than 100 percent of its EBITDA during the winter months, thus having adequate snowfall to support its attendance is critical. Because of its high fixed-cost structure, the company’s operating performance can be volatile during years of poor snowfall, which may increase its leverage. Somewhat offsetting this risk is Alterra’s success in growing its Ikon pass, which provides it with pre-committed revenue in advance of the winter season and reduces the risk stemming from weather volatility. Alterra seeks to generate a higher percentage of its revenue each year through the sale of its pass products, the majority of which are sold prior to the start of the season and lock in revenue for the season. The company has introduced lower-price tiers in recent years as well as two, three, and four-day products that supplant lift tickets for less frequent skiers who are more sensitive to day-of weather conditions. We believe that continued growth of the Ikon pass product could indicate substantial customer affinity for the company’s pass products and resort portfolio and significantly stabilize the company’s lift ticket revenue and reduce revenue and EBITDA volatility.
“Good geographic diversity and scale help mitigate risks. Alterra maintains good market share and geographic diversity as its 15-owned resorts and 39 Ikon partners are spread across North America, South America, Europe, Australia, New Zealand, and Asia. The company’s recent international partnerships include Chamonix Mont-Blanc Valley in France, Lotte Arai Resort in Japan, and Panorama Mountain Resort in British Columbia. We view Alterra’s scale and diversity favorably because the different geographic locations of its resorts modestly mitigate its weather risk and enhanced the value of its Ikon pass. Also, its pre-committed revenue from Ikon pass sales further mitigates its weather-related risks. In addition, Alterra’s scale and diversity can help mitigate any country or region-specific economic risks.
“The stable outlook indicates our expectation for Alterra to maintain total leverage below 6x over the next few years, even if a severe weather event limits snowfall and visitation. Although the company’s very high cash balances reduces the risk of increased leverage from debt-financed M&A activity, rating upside is constrained by our view that Alterra’s controlling owners, financial sponsor KSL Capital Partners and Henry Crown & Co. (a family office investment firm) could entertain a more aggressive strategy and corporate decision-making that prioritizes the interests of controlling owners to focus on maximizing shareholder returns.”
