The operator of Legoland and Madame Tussauds is raising £500m in new bonds, with the private equity-backed Merlin Entertainments seeking urgent funding to see it through a near total shutdown of its theme parks and attractions.
Merlin announced plans on Friday to raise money from debt investors, with the proceeds earmarked for working capital, funding operational costs, capital expenditures and paying the £12m-a-month interest bill on its debt pile of more than £4bn.
The funding would represent a liquidity lifeline for a company suffering from the coronavirus pandemic that has closed all but nine of its 130 sites. Merlin has already made use of government schemes to lessen its cost burden.
Last year US private equity firm Blackstone and Canadian pension fund CPPIB teamed up with the billionaire founding family behind the toymaker Lego to acquire Merlin, in a £6bn deal that ranked as one of the largest European buyouts in recent history.
But now, the bond’s documents include stark warnings about the company’s ability to weather the coronavirus crisis, including a so-called “going concern” warning from auditors KPMG. Merlin is also telling investors that “it is not possible to accurately predict the medium- or long-term impact of Covid-19 on our business and our industry”.
Merlin is set to pay interest rates of about 7 per cent to access the market, according to people familiar with the deal, having increased the size of the deal from an originally planned £350m on the back of strong demand.
This rate is smaller than the yields on its existing bonds, which have lower coupons but are trading at deep discounts. However, buyers of the new debt would own secured notes that rank ahead of the existing debt in any potential bankruptcy or restructuring.
One bond investor looking at the deal described the recent shutdown of its theme parks and attractions as “absolutely the worst case” for Merlin.
“And they are leveraged up as well,” the investor said, referring to the borrowings piled on the company to finance its acquisition. It will have over six times more net debt than adjusted 2019 earnings after the new deal.
“The problem is we don’t know how long everything is going to be closed,” the investor said.
Merlin has already secured benefits worth more than £20m from a UK government scheme to cut taxes for companies hit by the coronavirus pandemic, according to an investor presentation seen by the Financial Times.
It has also deferred paying rents, introduced voluntary pay cuts and furloughed about 80 per cent of its staff around the world in the wake of the closures.
The theme park operator is burning through £50m a month. It plans to use the extra funds from the bond sale to buy itself more time, as the money raised should leave the company with about £1bn of cash on hand.
The business, Europe’s largest theme park and visitor attraction company, is the latest in a string of leisure and travel companies to tap debt markets after shutdowns have squeezed any business that relies on bringing groups of people together.
Carnival, the cruise company, launched a $4bn bond sale this month backed by its ships as it scrambled for liquidity to see it through a $1bn monthly cash burn.
Blackstone’s purchase of Merlin was one of several deals that the private equity giant has struck in recent years in the leisure and entertainment industry. The world’s largest so-called “alternative asset manager” on Thursday revealed that it recorded big investment losses in its private equity business, which manages $175bn of capital.
Many suspect that leisure businesses will be among the last to benefit as governments consider phased reopenings when the coronavirus outbreak begins to ease.
“We have a strong 20-year track record as a highly cash generative company, and supportive owners,” Merlin said in a statement, adding that the debt would “strengthen our balance sheet and provide additional liquidity”.