S&P gives Vail Resorts negative outlook on ability to repay new debt

Bonds rating services Moody’s and S&P took a hard look at the ski industry in assigning a credit rating to Vail Resorts last week. The credit ratings were published April 29 as a result of Vail’s effort to take on an additional $600 million in debt through the use of issuing cash bonds.

While Vail Resorts received a stable outlook from Moody’s, S&P was not as optimistic, assigning the company a negative outlook in its examination of Vail Resorts’ ability to repay the debt it takes on. 

“The negative rating outlook reflects leverage above 4x in fiscal 2020 due to property closures and our expectation that Vail’s operating performance may continue to be impacted in fiscal 2021 as a result of decreased destination travel and consumer spending,” S&P Global Ratings wrote in their report.

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As of Jan. 31 Vail Resorts’ total liability including stockholder equity was about $5 billion, and the company’s annual earnings before interest, taxes, depreciation and amortization (EBITDA) was about $700 million. 

The company’s bonding effort would add another $600M in debt to the company’s balance sheet in exchange for an infusion of $600M in liquidity to be used for “general corporate purposes,” according to a press release issued by Vail Resorts on April 29. The press release initially listed the offering of senior notes as $500M but documents filed with the U.S. Securities and Exchange Commission show that the offering was bumped up to $600 million.

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‘Lower capital expenditures’

Moody’s, in issuing a stable outlook for Vail Resorts, said its view reflects the expectation that Vail Resorts winter operations “will reopen by the start of the 2020-2021 ski season and remain in operation for most of the ski season, along with some economic recovery, resulting in improved operating results and credit metrics in fiscal 2021. 

“The stable outlook also reflects Moody’s expectation for positive free cash flows in fiscal 2021 driven by lower capital expenditures and dividend distributions,” according to the Moody’s report. 

Vail Resorts CEO Rob Katz, on April 1, said dividends would be suspended for the next two quarters.

“We remain committed to returning excess capital to shareholders and will re-evaluate decisions on capital allocation in December 2020,” Katz said. 

While Vail Resorts has also deferred certain capital expenditures, including a terrain expansion at Beaver Creek, the company would like to move forward with an expansion of Keystone Resort, the U.S. Forest Service wrote May 1 in a press release. 

“Keystone is proposing to develop new ski terrain and increase terrain variety at the resort by developing 13 ski trails in Bergman Bowl and 3 ski trails in Erickson Bowl; installing a detachable chairlift in Bergman Bowl; installing 22 acres of snowmaking coverage on new beginner and intermediate ski trails; constructing a new ski patrol facility; and expanding the Outpost Restaurant,” according to the release. 

The Forest Service is seeking public comment during the month of May on Vail Resorts’ effort to initiate an Environmental Assessment on the Keystone expansion. 

Second wave possibility 

In their reports, both Moody’s and S&P said a second wave of coronavirus is among the potential concerns facing Vail Resorts. 

“Our assumption is that stay-at-home orders will be lifted before the company’s 2020/2021 winter ski season,” S&P wrote in their report. “However, a potential second wave of infections in the later part of 2020 may result in partial or full closures of many of Vail’s resorts. Additionally, depending on the nature of a recovery in the second half of 2020, consumers may remain averse to travel, which could weaken demand at Vail’s destination resorts.”

Moody’s said the leisure travel sector including ski resorts have been one of the sectors most significantly affected by the shock to the market as a result of the coronavirus outbreak. 

“The weaknesses in Vail’s credit profile, including its exposure to mandated stay at home orders, increased social distancing measures and discretionary consumer spending, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread,” Moody’s wrote in its report. 

S&P said it could revise its outlook to stable if they see more likelihood that resorts will remain fully operational through the 2020-2021 winter season, and if debt can reach levels below 4.25 times earnings. 

“While unlikely at this time, longer-term we could consider an upgrade if we believe operating performance can sustain lease-adjusted debt to EBITDA below 3.25x,” S&P wrote.

Moody’s said it too could upgrade its outlook if operations resume for the 2020-2021 ski season “and signs of good visitation trends and stable effective ticket and ancillary activity prices, leading to an expectation that the company’s operating profits return close to fiscal year 2019 levels and that debt/EBITA will approach 4.0x.”