SeaWorld: Bankruptcy Risk Is Real (NYSE:SEAS)


SeaWorld (SEAS) is likely to be on the path to bankruptcy. The pandemic destroyed the company’s business, as its revenues in Q2 declined by more than 90% and its net loss for the three-month period was $131 million. With a cash-to-debt ratio of 0.18x, the company’s balance sheet is overleveraged, and it’s unlikely that the reopening of parks will help SeaWorld to survive. Despite the fact that it raised liquidity earlier this year at over 8% rate, the company expects to continue to burn $20-25 million monthly until the end of the year, and there’s no guarantee that it’ll be able to return to its per-COVID-19 capacity levels in the foreseeable future. While the stock has slowly recovered from its March lows, its upside is limited. The shares will likely trade in distressed levels in the next few months, and for that reason, SeaWorld is uninvestable.

Avoid, Avoid, Avoid

SeaWorld has been executing a turnover in the last two years, and the stock managed to show a decent performance from 2018 to 2019. However, after COVID-19 started to spread around the globe, its business was disrupted, as its parks in Florida, Texas, California, and other states were forcefully closed. As a result, the company lost more than half of its value. While most of SeaWorld’s parks are once again reopened and the company is able to make a small portion of revenue, its future still looks bleak.

In Q2, SeaWorld operated a total of only 98 working days across all of its parks, while a year ago, it operated nearly 900 days in the same time period. During the three-month period, SeaWorld greeted only 300,000 guests, down by 6.2 million from a year ago, while its net loss from April to June was $131 million, which is a decline of $183.7 million in comparison to the same period last year. In addition, during the six-month period from January to June, SeaWorld had a total of 2.6 million guests, which is a decline of 7.2 million guests from a year ago. In addition, most of those guests visited the company’s parks before the pandemic during the last two months of Winter. As a result, the company’s revenues in the first half of the year were only $171.6 million, while its total net loss was $187.5 million.

The problem with SeaWorld and all the other parks in the world is that most of them require lots of capital to be able to successfully operate. As a result, their balance sheets are overleveraged most of the time, but at least they’re able to show growth and refinance debt during normal times. However, in times like today, when the economy is weak and parks operate at limited capacity, it becomes harder to service the debt. This is precisely what’s happening with SeaWorld right now. The company has an enormous debt burden, as its cash-to-debt ratio is only 0.18x, and it has no other option but to raise additional debt at high interest rates and hope for a quick recovery of the business in order to be able to service all that newly issued debt. In addition to that, SeaWorld continues to burn cash on a daily basis due to the pandemic, and at the end of June, it had $376 million in cash reserves, a decline from $400 million at the end of April. While the company managed to boost its liquidity by raising $500 million worth of secured notes in late July, the interest rate of those notes is 9.5%. Considering that SeaWorld will continue to lose cash and operate at a limited capacity, there’s a real possibility that the company might become bankrupt in the foreseeable future due to a high debt load.

In addition, the latest private debt placement that SeaWorld executed is likely going to be used by debt lenders to take some portion of its assets during bankruptcy hearings. After all, the company is in a distressed state, and some parts of its assets, such as real estate, have more value on their own than under the roof of SeaWorld. Also, the state and federal regulations alone make it hard to imagine how SeaWorld could survive and thrive in the current environment. While the company has finally opened its San Diego SeaWorld park a few weeks ago, it will not help the business to return to its pre-COVID-19 profitability levels anytime soon. In addition, revenues will stay at distressed levels, and in FY21 and FY22, they are expected to be only $365 million and $940 million, respectively. In comparison, in FY20, the company had $1.4 billion in revenues.

Source: Seeking Alpha

The reality is that there are too many red flags, which make it impossible to justify a long position in SeaWorld. After all, with negative margins, the company is unable to make money and will be required to raise even more debt along the way, which will increase its debt load even more.

Since SeaWorld’s business relies on having lots of people interacting with each other, it will not be able to fully recover until the virus is contained, even though it has opened most of its parks. Considering that vaccines are not going to be deployed by the end of this year, it’s very likely that the stock will continue to trade at distressed levels.

While in the past, the third quarter has been the best-performing one in the company’s history, that’s not going to be the case this time. As revenues and profits will be down Y/Y, the company will continue to burn cash at a rate of $20-25 million per month. In addition, SeaWorld will have $2.5-3 million in severance expenses during the period, as it’s in the midst of firing thousands of workers as a result of a slow recovery and weak demand. Since SeaWorld’s bottom line will not improve anytime soon, while most of the expenses will not go anywhere, as parks have lots of fixed maintenance costs, we believe that it’s better to avoid the shares and look for more attractive opportunities on the market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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