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Palace Parent Could Turn to IPO to Pay Off Debt

The parent of Newport Beach-based Palace Entertainment LLC could turn to an initial public offering as a way to pay down $430 million of the leisure-park unit’s debt that’s due in about a year and a $120 million credit line that needs to be reset by mid-January.

The debt and credit line were cited by Moody’s Investors Service in New York in a downgrade of Palace’s corporate rating last week.

It cut Palace from B2 to B3. A B rating covers “speculative [debt] subject to high credit risk.”

Palace did better on the outlook issue by Moody’s, which recast its view of the company from “negative” to “developing” because it “expects [Palace’s] parent company … to pursue an initial public offering or attempt to refinance” the debt.

Palace owns or operates 22 leisure parks—an industry term for properties smaller than better-known amusement parks such as Disneyland Resort or Knott’s Berry Farm—in 10 states.

Several are in Southern California, but none are in Orange County.

Leisure parks focus on one attraction or activity, such as water, history or animals, and a smaller ungated cousin, the family entertainment center, is often a large arcade with outdoor features, such as miniature golf and go-karts.

Palace is part of Parques Reunidos Servicos Centrales SA in Madrid, which is controlled by London-based private equity firm Arle Capital Partners Ltd.

Parques Reunidos has 55 leisure parks in 12 countries, according to its website.

Operations

Parques bought Palace in 2007 for $330 million.

Palace Chief Executive Fernando Eiroa leads a company that, Moody’s said, owns and operates six theme parks, eight water parks, two animal parks and five family entertainment centers, and runs one additional water park it doesn’t own.

Its roster has been larger, but in 2014 it sold 14 family entertainment centers and a water park for an undisclosed sum to Apex Parks Group in Aliso Viejo, founded by former Palace President Al Weber Jr.

Apex is backed by private equity firms Broad Sky Partners in New York and Edgewater Funds in Chicago. It now has 16 parks in five states, including the Boomers family entertainment centers in Irvine and Fountain Valley.

Palace said at the time that it wanted to focus on the gated parks, which are in the upper tier of the leisure parks category, and Moody’s numbers seem to bear that plan out.

6.4 Million Visitors

Moody’s puts Palace’s revenue for the year ended Sept. 30 at $261 million.

The rating service said the parks owner had improved its position last year, with the ratio of its debt to earnings before interest, taxes, depreciation and amortization dropping to 5.4 in the first quarter, down from 6.4 a year earlier.

“The prospects for a refinancing are supported by the improved performance during the 2015 operating season,” the ratings action report by Moody’s said.

Gated parks are three-fourths of Palace’s portfolio but bring 97% of its revenue. The five family entertainment centers it owns—25% of its portfolio by property count—provide the other 3% of revenue, Moody’s said.

The parks, excluding family entertainment centers, had 6.4 million visitors last year.

Water parks did especially well for Palace last year.

Moody’s cited “strong organic growth” at those eight facilities.

The rating service said Palace had $23 million in cash as of the first quarter of this year and expects the parks operator to spend about $38 million on capital projects this year, up from about $30 million in 2015.

Debt

Debt remains a problem for Palace, according to Moody’s, which said it considers “Palace’s liquidity position to be weak” because it needs to retire the two debt facilities by early 2017.

The $430 million note due next April carries a rate of about 8.9% and requires a twice-yearly interest payment of $19 million. The note also requires that Palace use “100% of net cash proceeds that are not reinvested within one year” to pay down the balance, and Moody’s said “substantially all” of Palace’s “wholly owned assets are pledged to the” debt.

The credit line has only $6 million drawn on it, Moody’s said, but the service expects “the company’s seasonal revolver borrowings will increase through the spring (of 2015) to approximately $40 to $45 million” before the summer season begins at the parks and after a $19 million interest payment this month.

Spring is when parks prepare for busy periods of the year—completing repair projects and beginning to hire staff.

The industry is “heavily seasonal, and requires significant re-investment to maintain a competitive service offering,” the Moody’s report said.

Moody’s expects Palace to pay down the credit line before it needs to be renegotiated: “Cash flow generated during the operating season is expected to be directed to paying down the revolver in full by the end of the season.”

Praised, Pledged

Moody’s praised Palace’s “long-standing management team” and parent company ownership that “allows for sharing of best practices and consolidated purchasing power.”

It said “an upgrade would occur” if conditions—to include resolution of the debt situation; 2016 operating results comparable to 2015’s; a debt to EBITDA ratio below 6; free cash flow after capital expenditures; and “adequate liquidity”—were met.

Palace executives could not be reached to comment for this story.

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