Score Motion: Moody’s assigns Caa1 CFR to Cirque du Soleil; outlook destructive
International Credit score Analysis – 11 Dec 2020
$616 million of recent rated debt
Toronto, December 11, 2020 — Moody’s Buyers Service, (“Moody’s”) assigned a Caa1 company household score (CFR) and a Caa1-PD likelihood of default score to Cirque du Soleil Holding USA NewCo, Inc. (“Cirque du Soleil”). On the similar time, Moody’s assigned a B2 score to its $316 million senior secured first lien time period mortgage due November 2025 and a Caa2 score to its $300 million second lien time period mortgage due November 2027. Cirque du Soleil Canada Inc. is a co-borrower. The outlook is destructive.
Rankings Assigned:
Company Household Score, Assigned Caa1
Chance of Default Score, Assigned Caa1-PD
$316 million Senior Secured First Lien Time period Mortgage due in 2025, Assigned B2 (LGD2)
$300 million Senior Secured Second Lien Time period Mortgage due in 2027, Assigned Caa2 (LGD5)
Outlook Motion: Outlook, Assigned as Destructive RATINGS RATIONALE
Cirque du Soleil (Caa1 destructive) is constrained by: (1) execution dangers round present redeployment tied to financial uncertainty and potential COVID-19-related delays in 2021; (2) weak liquidity; (3) leverage sustained above 10x and destructive free money movement via 2022; and (4) substantial focus in Las Vegas, which can account for near half of EBITDA in 2022. The corporate advantages from: (1) distinctive model recognition and pricing mannequin focusing on greater earnings households; (2) a powerful operational monitor file and administration’s ample expertise creating, operating and buying exhibits; (3) the flexibility to leverage a portfolio of long-lived exhibits requiring minimal investments because it rebuilds scale; and (4) a partnership mannequin for resident exhibits minimizing capital outlays and supporting operational stability.
The destructive outlook displays weakening liquidity into 2022 and execution dangers across the tempo of present redeployment.
Cirque du Soleil’s liquidity is weak. As of December 31, 2020, we estimate that money available will whole about $160 million, in comparison with makes use of of about $120 million in destructive free money movement over the next twelve months ended December 2021. Cirque du Soleil has no time period mortgage amortizations. By early 2022, we estimate that Cirque’s money available will decline to a minimal working money steadiness of about $10 million; likewise, any deviation from its marketing strategy or postponement of present revenues would compromise Cirque’s means to proceed working within the absence of further sources of liquidity, reminiscent of a revolving credit score facility. Though the time period mortgage settlement permits Cirque to lift as much as $55 million below a revolving credit score facility (and $30 million in letters of credit score), there aren’t any commitments thus far and we won’t give credit score for these potential sources of future liquidity till they’re made out there. The corporate shouldn’t be topic to any monetary covenants. Cirque du Soleil has a restricted capability to promote some property to lift money with a permitted reinvestment interval of twelve months.
The primary and second lien senior secured time period loans are issued by Cirque du Soleil Holding USA NewCo, Inc. and co-borrower Cirque du Soleil Canada Inc. and assured by the highest holdco Spectacle Bidco Holdings Inc. The $316 million first lien time period mortgage due November 2025 is rated B2, two notches above the Caa1 company household score, reflecting its senior place within the capital construction. The B2 end result incorporates a one-notch override on the Loss-Given Default mannequin end result of B1 given the allowance below the phrases of the credit score settlement for the issuance of as much as $55 million in a revolving credit score facility that will have precedence rating senior to the primary lien time period mortgage, and our evaluation of low asset safety. The $300 million second lien PIK time period mortgage due November 2027 is rated Caa2, one notch beneath the company household score, reflecting its junior place and rating behind the primary lien debt.
The rated time period loans shouldn’t have any monetary covenants. The primary lien time period mortgage doesn’t present incremental facility capability however does allow the issuance of different debt together with: (1) a revolving credit score facility for as much as $55 million, which might rank senior to the primary lien debt; and (2) a letter of credit score facility for as much as $30 million, rating pari passu with the primary lien debt. All subsidiaries are restricted and any wholly-owned subsidiary holding greater than 2.5% of whole property is obligated by covenant to turn into a guarantor, controlling collateral leakage by precluding property transfers to unrestricted subsidiaries and limiting asset transfers to non-guarantors. Solely wholly-owned subsidiaries should act as guarantors, however ensures will not be robotically launched solely as a result of such subsidiaries stop to be wholly-owned, decreasing the chance of future assure releases. The credit score agreements requires that 100% of internet money proceeds be used to repay the credit score facility, if not reinvested inside twelve months, with no-step-downs on the prepayment/reinvestment requirement.
Cirque du Soleil will stay uncovered to social dangers arising from the coronavirus outbreak throughout 2021 because it pertains to the well being of staff and audiences because it ramps up exhibits starting in Q2. Different ongoing social dangers embody the corporate’s publicity to shifting demographics and client preferences mixed with the comparatively high-priced, highly-discretionary nature of its exhibits. The corporate addresses these dangers via efforts to stay finely attuned to leisure preferences amongst its buyer base within the growth of its present content material. Cirque du Soleil can also be uncovered to reputational dangers related to worker security on condition that performers usually perform bodily harmful acts.
Governance concerns embody Cirque du Soleil’s possession by collectors, of which there’s a majority share of personal fairness sponsors which can introduce aggressive monetary insurance policies over time, together with the upkeep of elevated leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The scores might be downgraded if liquidity weakens, or if the corporate is unlikely to attain secure working efficiency.
The scores might be upgraded if adjusted debt to EBITDA developments in direction of 7.5x (10.8x forecast for 2022), EBITA to curiosity protection is sustained above 1.0x (0.3x forecast for 2022), EBITA margins are sustained above 10% (2.5% forecast for 2022), and if scale will increase with revenues surpassing $500 million ($670 million forecast for 2022).
The principal methodology utilized in these scores was Enterprise and Shopper Service Trade revealed in October 2016 and out there at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Score Methodologies web page on www.moodys.com for a replica of this system.
Cirque du Soleil is a supplier of distinctive, reside acrobatic theatrical performances. Starting in 2021, the corporate will relaunch 6 resident exhibits and 6 touring exhibits. In 2021, Moody’s expects the corporate to generate about $180 million in revenues. Cirque du Soleil is owned primarily by a fragmented group of collectors (represented by prior debtholders), together with personal fairness traders Catalyst Capital, Sound Level Capital, CBAM Companions and Profit Road Companions .
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