S&P Global Ratings has lowered its base-case revenue and EBITDA assumptions for Vail Resorts as it expects consumer concerns related to COVID-19, potential additional restrictions on travel and indoor activities, and limited ski resort capacity to likely impair Vail’s’ revenue in fiscal 2021 (ending July). Additionally, S&P noted that Vail plans to issue $500 million in unrated convertible senior unsecured notes due 2026 to enhance liquidity amid the ongoing pandemic.
S&P said, “We believe the negative effects of the pandemic will be mostly limited to the 2020/2021 ski season. Specifically, we anticipate its visitation and ancillary spending could normalize by the 2021/22 ski season if an effective vaccine is widely disseminated by mid-2021. Our recovery rating on the company’s existing $600 million senior unsecured notes due 2025 is unchanged; we believe the absence of subsidiary guarantees for noteholders under the terms of the proposed notes offering provides enough structural protection to existing senior unsecured lenders for us to consider the new convertible notes junior in the capital structure. As a result, we believe recovery prospects for existing senior unsecured lenders are unchanged.”
S&P said it placed Vail’s debt ratings under CreditWatch with negative implications to reflect “the possibility we could lower our ‘BB’ rating on Vail if the pandemic’s effects on the 2020/21 ski season are worse than our already depressed assumptions or if we believe the company will burn enough cash in its fiscal 2021 to keep fiscal 2022 net leverage above our 4.25x downgrade threshold. We could also lower the rating if prolonged COVID-19-related restrictions or closures, leveraging acquisitions, or other leveraging uses of cash lead us to believe its leverage will remain above our 4.25x downgrade threshold in fiscal year 2022.”
“We expect to resolve the CreditWatch placement in the next few months as we gain greater visibility into ski visitation at destination resorts, and the shape of Vail’s revenue, EBITDA, and cash flow trends in fiscal 2021.”
Separately, Moody’s Investors Service affirmed the ratings for Vail Resorts, including its Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating following the company’s launch of the proposed $500 million convertible notes (unrated) offering. Moody’s took no action on the Speculative Grade Liquidity rating of SGL-1. Concurrently Moody’s upgraded the rating for the company’s existing $600 million senior unsecured notes due 2025 to B1 from B2. The outlook remains stable.
Proceeds from the $500 million convertible notes will be used to increase cash on hand and for general corporate purposes.
Moody’s wrote in its analysis, “Moody’s expects Vail’s gross debt-to-EBITDA leverage will remain at above 6.0x in FYE July 2021 as the 2020-2021 ski season will be challenging due to social distancing measures and capacity constraints as the result of the ongoing coronavirus pandemic. There is also the possibility of shutdowns in certain locations if the coronavirus situation continues to worsen this winter. Strong season pass sales for FY2021 in part reflect reservation policies established to control facility utilization, but also indicate healthy underlying demand for winter sports activities. A higher mix of visitation by season pass holders will limit availability for higher-priced daily ticket sales that will reduce lift revenue, while other mountain revenues such as from restaurants, rentals and lessons will also be down meaningfully in FY 2021.
“Moody’s affirmed the ratings because looking past FY 2021, Moody’s expects debt-to-EBITDA leverage will decline to below 5.0x with the assumption that earnings will recover in FY 2022 when capacity restrictions are eased. With the proposed $500 million convertible notes offering on top of the $600 million term loan issued in April, Vail’s very good liquidity with over $1.7 billion of total pro forma cash and unused revolver capacity will be beneficial to manage through the uncertain operating environment in FY2021, which is also an important factor in the affirmation of ratings.
“The upgrade of the rating for Vail’s existing $600 million senior unsecured notes due 2025 to B1 from B2 is due to the additional loss absorption cushion provided by the issuance of the subordinated debt, which reduces the loss given default estimate for the 2025 notes. The additional liquidity provided by the $500 million convertible notes will also be available for reinvestment in earnings-enhancing projects and acquisitions once the economic downturn and coronavirus ease, and this would increase the asset base and recovery potential for more senior creditors.
