NOTE: This blog post originally ran June 17, 2020 on ThemedReality.com
On Sunday, December 22, 2019, Scott Ian Ross was appointed as an independent director of Diamond Eagle Acquisition Corporation. That same day, the company entered into an agreement to acquire and merge with Draft Kings, an online sports betting venture, in a deal valued at $3.3 billion. Upon joining the Diamond Eagle board, Ross was awarded 20,000 shares of the Company’s Class B common stock at $0.002 per share. The next day, when the market opened, the stock was valued at $11.75. By February 14, it had peaked at $21.97.
To put this in “whoa” figures: The 20,000 shares of stock would have cost Ross $40. If he sold all his shares on February 14, he would have made a profit of $439,360.
Such profitably is a far cry from the condition the company he chairs, SeaWorld Entertainment, finds itself in as it comes out from an economic shutdown.
Over the past four months, I’ve been exchanging research with a number of journalists, bloggers, and financial analysts trying to decipher the company’s current situation as it dealt with the shutdown of its theme parks, furlough of its staff, animals that can’t be neglected, and the sudden departure of a newly hired CEO.
I’ll start with liens.
While the index of liens I have is extensive, it is not thorough, and is still being compiled. This is primarily due to discrepancies between state and county databases on how information is searched and what information is available. Because of this, I’ll keep the information more generalized, rather than addressing specific liens. If you’re interested in something more specific, I’ve come across three rather good articles that go into more detail, and I highly recommend all three:
While it’s common for contractors and vendors to place liens on a property for nonpayment, we usually see no more than a dozen at a time. With SeaWorld, I’ve confirmed more than 150 liens across all of the company’s parks filed in the four months between March and June 2020, and the number keeps climbing as additional data becomes available.
There are currently 56 confirmed liens on the Orlando property. This compares to only 9 for the entire year of 2019.
Between March and June, there were 36 confirmed liens on the San Diego parks, 26 on the San Antonio parks, and 30 on the Tampa parks. I was unable to locate any 2019 liens on these properties. There are also liens on the Williamsburg and Lancaster properties. The liens are on either individual rides or attractions or the entire park and the amount owed varies from the millions of dollars to under $500. Every one of the company’s 2020 projects – including water slides and roller coasters, is impacted by a lien. This includes the already opened Texas Stingray in San Antonio.
What do I make of all this?
I have a strong feeling the company is contemplating filing for bankruptcy. Here’s why (and I’ll try to keep it simple since finance is a complicated thing):
On April 21, Moody’s reported “SeaWorld is projected to have over $400 million of cash on the balance sheet, although the $332.5 million revolver is expected to have $313 million drawn with limited availability after outstanding letters of credit.”
Usually, the company pulls from the credit line at the beginning of the year, then repays during the second half. However, with the unexpected prolonged park closures, SeaWorld needed to supplement its credit line. So it sold $227.5 million of secured notes in a private sale.
And this is where things get interesting.
The revolving credit line, which is administered by Bank of America, is contractually listed as the first guaranteed lien holder. With the company’s properties having been placed as collateral for the credit line, should SeaWorld fail to make payments in a timely manner or file for bankruptcy, BofA and its partners have the right to obtain the company’s assets before anyone else.
So let’s say SeaWorld does file for bankruptcy and the credit line bankers get first dibs, pulling just enough to pay off the balance with interest, fees, and fines. Do the rest of the lienholders come next?
Not exactly. There’s that secured note sale. My curiosity was piqued when I noticed that it wasn’t arranged through SeaWorld’s normal avenues. Instead, it was arranged by Paul, Weiss, Rifkind, Wharton & Garrison, which happens to be Hill Path Capital’s law firm.
If you’re not familiar with Hill Path, remember that fellow, Scott Ian Ross – the one who profited from joining the Diamond Eagle board and who’s the chairman of SeaWorld’s board? Hill Path is Ross’s investment firm. He’s the founder. And Hill Path owns more than 34% of SeaWorld stock. So whenever you hear someone complaining that the SeaWorld shareholders should vote him off the board, keep in mind that it takes 66% of the shareholder vote to do so. Ross controls just enough shares to block any such vote. Besides, if they could vote him out, how would that work? David D’Alessandro was voted out as SeaWorld chairman in 2017, and the board overturned shareholder wishes and asked him to stay. This, today, is very much Ross’s board.
I digress. $227.5 million in secured notes was sold to a private party, with the sale finalized April 30. There’s no public record who the note buyer is, but it is likely an individual or company closely associated with Ross and Hill Path. Here’s why I believe this:
As with the credit line, in addition to the company’s parks and other tangible assets, additional agreements were written up guaranteeing the notes with the company’s copyrights, patents, and trademarks (highly valuable, especially overseas). To use the vernacular of the 1800s, SeaWorld offered up the whole kit and caboodle.
Here’s what I think. Keep in mind that I’m not an expert on everything, like an attorney or a whale trainer named John. I’m just a journalist who covers the attractions industry during the day for a trade publication and blogs about it at night. This is strictly my opinion and it’s nothing more nor less. You’ve been warned, in case you want to quote it as indisputable fact.
The credit line and the notes are contractually considered “first obligations.” Once the obligations to the first lien holder have been met, the secondary lien holder then has priority access to the company’s assets. As this secondary lien holder is the note owner, and as I suspect it’s an entity close to Ross and Hill Path, they will likely take all the remaining company assets, preserving them for Hill Path’s future use, and leaving nothing for the company’s contractors and vendors in the process.
Again, I could be wrong on this, but I’m comfortable enough with this concept to share my thoughts and I’ll issue a correction if I’m wrong.
There are some other clues about a potential bankruptcy that I won’t cover here, such as:
The fact that after the prolonged closure, a park needs to reach 80% capacity to start turning a profit and that in this extended COVID-19 environment, that’s not likely to happen. (Unlike China and Japan, where parks were closed down again after reopening, the most we’ll likely see during a COVID resurgence in the US is a renewed diminished capacity at the parks).
The fact that just days after furloughing 90% of the staff and reducing executive salaries by 20%, the company awarded $6.8 million in stock bonuses to its executive tier. This early issuance corresponds with the behavior of a number of companies contemplating bankruptcy (most recently CEC, or Chuck E Cheese), as bonuses are not allowed under bankruptcy law.
The fact that there are whispers within the zoo and aquarium community that SeaWorld is sending out feelers for potential buyers of its collections. Animal sales equals instant cash.
No. I won’t discuss any of these today. Maybe another time.