Outlook On Spanish Resort PAESA Entertainment Holding (PortAventura) Revised To #B-# Rating Affirmed

Stocks and Financial Services Press Releases Monday December 19, 2016 17:36
MADRID--19 Dec--S&P Global Ratings

MADRID (S&P Global Ratings) Dec. 19, 2016--S&P Global Ratings today revised the outlook on Spanish destination resort PAESA Entertainment Holding, S.L. (PortAventura) to positive from stable. At the same time, we affirmed the 'B-' issuer credit rating on the company.

In addition, we affirmed our 'B-' issue rating on PortAventura's €420 million senior secured notes, issued by PortAventura Entertainment Barcelona B.V. The recovery rating on the pass-through loan is '4', indicating our expectation for average recovery prospects in the higher half of the 30%-50% range, in the event of a payment default.

The outlook revision reflects our view that PortAventura's credit ratios have improved further, driven by ongoing solid operating performance.

PortAventura's operating results are generally ahead of our expectations for 2016. We forecast revenues will increase by 7% for full-year 2016 and adjusted EBITDA will exceed €86 million. We believe PortAventura's solid performance will continue in 2017, driven by the anticipated Ferrari Land opening on April 7, 2017. Management has confirmed this opening date, despite a recent fire that damaged a façade of the Venetian Campanile building in Ferrari Land (the damage was assessed as fairly mild and costs are expected to be covered by PortAventura's insurance policy).

By the time Ferrari Land opens, PortAventura will have invested about €90 million in total; 80% of this has already been committed as of year-end 2016. The new park is aimed primarily at families and Ferrari fans and will include the highest and fastest roller coaster in Europe. We expect it will bring about a notable increase in visitors for 2017 (more than 0.7 million to Ferrari Land alone, and close to 5 million in total). We understand PortAventura has signed a 10-year exclusivity agreement with Ferrari, under which no other Ferrari theme park can be opened in Europe.

We continue to assess PortAventura's business risk profile as weak, given its reliance on a single-asset property for cash flow generation, its limited operating and geographic diversity, a high fixed-cost base, and notable seasonality of operations. Although we expect Ferrari Land to add to its business diversification, we note the location is next to PortAventura's other theme parks so the single-asset risk is still relevant.

In terms of client base, we note that domestic visits have increased by over 10% to about 68% of total attendance, partly offsetting the recent more than 50% decline in Russian visitors (mainly on ruble depreciation). In terms of seasonality, PortAventura generates about 65% of its EBITDA in the third quarter, which further exposes the company to possible earnings volatility.

Lastly, as a leisure destination resort PortAventura is exposed to discretionary consumer spending--much more so than regional parks, for example, where entry prices tend to be lower.

The abovementioned constraints are partly offset by PortAventura's leading EBITDA margins, with a successful track record in yield management; fairly high barriers to entry given the high capital intensiveness of the industry; and its favorable location in terms of good weather and an attractive tourism market. Spain is expected to have received over 70 million tourists in 2016 (about 25% in Catalonia).

PortAventura, which is located on the Costa Dorada in Spain, is the second destination resort in Europe (after Euro Disney) by number of resort rooms and visitors. The resort includes a main park with six themed areas, a water park, four 4-star and one 5-star themed hotels with a total of 2,100 rooms, and a convention center for 4,000 people. In 2017, a third theme park dedicated to the Ferrari brand will be added to the offering.

We assess PortAventura's financial risk profile as highly leveraged, primarily reflecting the group's high debt to EBITDA of above 5x. Our financial risk profile assessment is also constrained by the financial sponsor ownership by

Investindustrial and KKR.

Although PortAventura's financial risk metrics are at the top end of the highly leveraged category--particularly interest coverage metrics--we view the single-asset risk embedded in the business risk profile as high, requiring a further adjustment in the overall rating, in particular when compared to our rated leisure park operators. Therefore, we continue to apply a negative adjustment to the overall rating to reflect our negative comparable ratings analysis assessment.

The positive outlook reflects our view of at least a one-in-three chance that we could upgrade PortAventura in the next 12 months if the Ferrari Land opening materializes as planned, bringing notable top line and EBITDA growth and driving adjusted debt to EBITDA below 5x. We also expect positive free operating cash flows after capital investments as of 2017.

We could consider an upgrade if adjusted leverage metrics fall sustainably below 5x, free operating cash flow turns positive in 2017, and the private equity owners indicate that the financial policy would remain supportive at a higher rating level. We also expect EBITDA interest coverage to remain consistently above 2x during the period.

We could revise the outlook to stable or negative during the next 12 months if PortAventura's business performance and key metrics fall materially below our expectations. Negative rating pressure could also build if Port Aventura's leverage were to materially increase beyond our base case, liquidity fell to less than adequate, or if free operating cash flow remained negative.


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