Grumpy
04-12-2009, 11:16 AM
Danger lurks in the credit waters as the company tries to rework its debt.
Jason Garcia | Sentinel Staff Writer
April 8, 2009
Orlando's No. 2 theme-park resort is warning that it could face a cash crunch by next spring, as turmoil in the credit markets — and an obscure clause in its long-standing contract with famed filmmaker Steven Spielberg — complicate its efforts to restructure nearly $1 billion of debt.
If Universal Orlando is unable to rework the loans in coming months, it could be forced to slash spending on new attractions, seek more money from its owners or even put a piece of the resort up for sale.
According to a recent filing with federal regulators, the companies that hold and operate the two-park resort must repay or refinance $950 million worth of loans by April 1, 2010. If the companies, led by Universal City Development Partners, are unable to meet the deadline, an additional half-billion-dollar loan — this one backed by virtually all of Universal Orlando's property and equipment — would suddenly come due, as well.
Refinancing such large amounts won't be easy. Hobbled by bad loans issued during the credit boom, lenders are now imposing far stricter terms on customers in all industries, tourism included. Six Flags Inc., for example, is considering bankruptcy because the big amusement-park chain has so far been unable to renegotiate its debt.
Universal's attempts to refinance are further complicated by its 22-year-old consulting contract with Spielberg, whose movie hits inspired multiple attractions in the resort's theme parks. A provision that takes effect in June 2010 gives Spielberg — who has been receiving annual consulting fees, including $20 million last year alone — the right to instead demand an immediate buyout that analysts say would likely cost Universal several hundred million dollars.
These issues are colliding even as Universal, like its rival theme parks, slogs through the worst recession in decades. Its attendance and revenue began to fall in 2008, and experts expect those declines to accelerate this year.
Universal's two theme parks — Universal Studios Florida and Universal's Islands of Adventure — drew a combined 10.6 million people last year, trailing only Walt Disney World and Disneyland in the U.S. The resort employs about 13,000 people, making it Central Florida's sixth-largest employer.
When asked about its debt situation, Universal requested written questions but then declined to answer them, saying it did not want to run afoul of financial regulations, discuss specific business actions or engage in "speculation." Instead, it would comment only broadly.
"Historically, we have managed our debt and we've consistently met our financial obligations," Universal spokesman Tom Schroder said. "We will continue to monitor market conditions and work with all of our financial partners to be prepared for future market conditions."
But the situation is precarious enough that Moody's Investors Service last week cut Universal's debt ratings, some for the second time in less than a month, suggesting that the company is in danger of defaulting on some of its loans.
Experts say that, at a minimum, Universal will probably be forced to pay significantly higher interest costs and accept smaller credit limits to restructure its debt. That could eat into the resort's ability to spend money on future attractions.
But it's also possible, they say, that Universal City Development Partners will have to seek more money from its co-owners, the Blackstone Group and a subsidiary of NBC Universal, or raise cash from new investors. That could include offering creditors the right to trade debt for a company stake, or auctioning off an ownership interest.
Moody's said in its downgrades that "an ownership transition is a risk" given the looming debt payments.
A spokeswoman for NBC Universal deferred to Universal Orlando. A spokeswoman for Blackstone declined to comment.
Moody's and other analysts say a bankruptcy filing is unlikely. They say the Orlando resort's business, which produced $180 million in operating profit last year, is fundamentally strong and stands to benefit from the opening of the Hollywood Rip Ride Rockit roller coaster later this year and the Wizarding World of Harry Potter in 2010. They also say the resort's co-owners have incentive to preserve their investments — particularly NBC Universal, because of the theme parks' strategic ties to that company's movie and television studios.
Still, Christopher James, the William H. Dial eminent scholar of finance at the University of Florida, noted that the rating Moody's has assigned to some of Universal's debt is near the bottom of its scale.
"That's telling you the situation is pretty serious," James said.
Universal has warned in previous government filings that it could run into trouble restructuring its debt. But the warnings this year are stronger and more urgent.
For example, Universal said last year that Spielberg's right to a costly buyout as of June 2010 "could" make refinancing its debt more difficult. But in last month's filing with the U.S. Securities and Exchange Commission, it said Spielberg's buyout clause is now "likely" to make refinancing more difficult.
Universal declined to say whether it has begun negotiations with Spielberg to remove or delay the buyout clause. A spokesman for Spielberg also declined to comment.
"Universal is approaching, in a really tight timing, a big liquidity event where they are going to face a known but substantial need for cash," said Jim Gilkeson, a professor of finance at the University of Central Florida. "And it's not the best market to be seeking that."
Universal has already bought itself some time: A $509 million loan was initially set to come due as early as Dec. 1 of this year if the company wasn't able to refinance the other $950 million in loans. But last summer, Universal paid $4.3 million and accepted higher interest rates in exchange for putting that deadline off until April 1.
Hal Vogel, a leisure-industry stock analyst, said he thinks Universal will ultimately be able to refinance its debt. But he also said the higher borrowing costs the park is likely to incur will force the resort to curtail its capital spending.
"They will probably take a very long time before they put up new attractions beyond Harry Potter," Vogel said.
A longer version of this story can be found online at OrlandoSentinel.com/business. Jason Garcia can be reached at jrgarcia@orlandosentinel.com or 407-420-5414.
Jason Garcia | Sentinel Staff Writer
April 8, 2009
Orlando's No. 2 theme-park resort is warning that it could face a cash crunch by next spring, as turmoil in the credit markets — and an obscure clause in its long-standing contract with famed filmmaker Steven Spielberg — complicate its efforts to restructure nearly $1 billion of debt.
If Universal Orlando is unable to rework the loans in coming months, it could be forced to slash spending on new attractions, seek more money from its owners or even put a piece of the resort up for sale.
According to a recent filing with federal regulators, the companies that hold and operate the two-park resort must repay or refinance $950 million worth of loans by April 1, 2010. If the companies, led by Universal City Development Partners, are unable to meet the deadline, an additional half-billion-dollar loan — this one backed by virtually all of Universal Orlando's property and equipment — would suddenly come due, as well.
Refinancing such large amounts won't be easy. Hobbled by bad loans issued during the credit boom, lenders are now imposing far stricter terms on customers in all industries, tourism included. Six Flags Inc., for example, is considering bankruptcy because the big amusement-park chain has so far been unable to renegotiate its debt.
Universal's attempts to refinance are further complicated by its 22-year-old consulting contract with Spielberg, whose movie hits inspired multiple attractions in the resort's theme parks. A provision that takes effect in June 2010 gives Spielberg — who has been receiving annual consulting fees, including $20 million last year alone — the right to instead demand an immediate buyout that analysts say would likely cost Universal several hundred million dollars.
These issues are colliding even as Universal, like its rival theme parks, slogs through the worst recession in decades. Its attendance and revenue began to fall in 2008, and experts expect those declines to accelerate this year.
Universal's two theme parks — Universal Studios Florida and Universal's Islands of Adventure — drew a combined 10.6 million people last year, trailing only Walt Disney World and Disneyland in the U.S. The resort employs about 13,000 people, making it Central Florida's sixth-largest employer.
When asked about its debt situation, Universal requested written questions but then declined to answer them, saying it did not want to run afoul of financial regulations, discuss specific business actions or engage in "speculation." Instead, it would comment only broadly.
"Historically, we have managed our debt and we've consistently met our financial obligations," Universal spokesman Tom Schroder said. "We will continue to monitor market conditions and work with all of our financial partners to be prepared for future market conditions."
But the situation is precarious enough that Moody's Investors Service last week cut Universal's debt ratings, some for the second time in less than a month, suggesting that the company is in danger of defaulting on some of its loans.
Experts say that, at a minimum, Universal will probably be forced to pay significantly higher interest costs and accept smaller credit limits to restructure its debt. That could eat into the resort's ability to spend money on future attractions.
But it's also possible, they say, that Universal City Development Partners will have to seek more money from its co-owners, the Blackstone Group and a subsidiary of NBC Universal, or raise cash from new investors. That could include offering creditors the right to trade debt for a company stake, or auctioning off an ownership interest.
Moody's said in its downgrades that "an ownership transition is a risk" given the looming debt payments.
A spokeswoman for NBC Universal deferred to Universal Orlando. A spokeswoman for Blackstone declined to comment.
Moody's and other analysts say a bankruptcy filing is unlikely. They say the Orlando resort's business, which produced $180 million in operating profit last year, is fundamentally strong and stands to benefit from the opening of the Hollywood Rip Ride Rockit roller coaster later this year and the Wizarding World of Harry Potter in 2010. They also say the resort's co-owners have incentive to preserve their investments — particularly NBC Universal, because of the theme parks' strategic ties to that company's movie and television studios.
Still, Christopher James, the William H. Dial eminent scholar of finance at the University of Florida, noted that the rating Moody's has assigned to some of Universal's debt is near the bottom of its scale.
"That's telling you the situation is pretty serious," James said.
Universal has warned in previous government filings that it could run into trouble restructuring its debt. But the warnings this year are stronger and more urgent.
For example, Universal said last year that Spielberg's right to a costly buyout as of June 2010 "could" make refinancing its debt more difficult. But in last month's filing with the U.S. Securities and Exchange Commission, it said Spielberg's buyout clause is now "likely" to make refinancing more difficult.
Universal declined to say whether it has begun negotiations with Spielberg to remove or delay the buyout clause. A spokesman for Spielberg also declined to comment.
"Universal is approaching, in a really tight timing, a big liquidity event where they are going to face a known but substantial need for cash," said Jim Gilkeson, a professor of finance at the University of Central Florida. "And it's not the best market to be seeking that."
Universal has already bought itself some time: A $509 million loan was initially set to come due as early as Dec. 1 of this year if the company wasn't able to refinance the other $950 million in loans. But last summer, Universal paid $4.3 million and accepted higher interest rates in exchange for putting that deadline off until April 1.
Hal Vogel, a leisure-industry stock analyst, said he thinks Universal will ultimately be able to refinance its debt. But he also said the higher borrowing costs the park is likely to incur will force the resort to curtail its capital spending.
"They will probably take a very long time before they put up new attractions beyond Harry Potter," Vogel said.
A longer version of this story can be found online at OrlandoSentinel.com/business. Jason Garcia can be reached at jrgarcia@orlandosentinel.com or 407-420-5414.