Six Flags targets bond investors' poor memories

, Daily Business Review

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Six Flags Entertainment Corp. is finding that junk-bond investors, basking in a record rally that has generated bigger returns than stocks the past four years, have short memories.

Two years after emerging from bankruptcy, the operator of such amusement parks as Six Flags Magic Mountain in California and Six Flags Great Adventure in New Jersey, may use more than half the proceeds from an $800 million note sale to buy back stock. Six Flags leverage ratio will rise to 3.6 times from 2, according to independent debt research firm Gimme Credit LLC

Junk-bond yields at 6.69 percent are 0.01 percentage point above the record low reached last week, according to the Bank of America High Yield Master II index, giving borrowers the upper hand as investors accept more risk to increase returns. Issuance quality has started to deteriorate, which may accelerate in 2013 as borrowers sense continuing demand, said Gershon Distenfeld, director of high-yield credit at AllianceBernstein Holding LP, which oversees about $230 billion in fixed-income assets.

"Here's a company that basically didn't pay its debt just a few years ago, and now it's able to issue a big fat blob of new debt at a relatively low interest rate and have the proceeds only partly repay existing debt and thus preserve the existing credit profile," Kimberly Noland, an analyst at Gimme Credit in New York, said. "The rest of it is going to the shareholders, which doesn't really improve things for bondholders."

Six Flags increased the offering of senior unsecured notes due in January 2021 to $800 million from an initially marketed $600 million before the debt priced Dec. 11 at 5.25 percent, according to data compiled by Bloomberg.

The Grand Prairie, Texas-based company is using $350 million to pay down a portion of $932 million in senior secured loans it had outstanding and can use as much as $500 million to repurchase common stock between now and 2015, according to a Dec. 11 regulatory filing.

Six Flags chief financial officer John Duffey and senior vice president of investor relations Nancy Krejsa did not return calls seeking comment about the company's financial structure.

Standard & Poor's rates Six Flags BB, the second-highest junk-bond grade. Moody's Investors Service puts it two levels lower at B1. S&P credit analyst Emile Courtney said operating conditions should remain stable because consumer spending growth, "while modest, is anticipated to be around 2 percent" in 2013.

'Poster Child'

Net income at Six Flags improved 31 percent to $253 million during the third quarter of 2012 from the similar period in 2011, which is the operator's busiest of the year, Bloomberg data show.

"Six Flags is a poster child for how a successful reorg can play out," said Ian Corydon, an equity analyst at B Riley & Co., an investment-banking firm in Los Angeles.

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