6 Flags And The Credit Crisis

On 8/5/2008 Will wrote this on the TeamLard Listserv:

Oh no! we should plan a six flags day bc it sounds like it's in danger of shutting down sooner or later!

In response I wrote this:

I'm going to go contrarian on this one. 6 Flag's Q2 financials shows that its gross Y2Y revenue has been stable and they reported a net profit (due to debt extinguishment). Given that the economy is tanking (July was the 7th consecutive month that the nation has had a net loss of jobs), I'm guessing that Six Flags is in a classic inferior good situation where people are staycationing their way out of Europe and into the nearest amusement park. Given that Q3 are the summer months, they might get a decent haul from this dynamic.

It turns out we both could be right.

7 days after the exchange above, 6 flags announced preliminary Q3 results:

...revenues for Q3 through August 12, 2008 have increased approximately 7.6%, or $23.5 million, over the prior-year period on fewer park operating days. The revenue increase is attributable to attendance growth of 5.1%, or 407,000, to 8.43 million guests and a 2.4%, or $0.92, increase in total revenue per capita to $39.55.

So perhaps the economic slowdown has benefited 6 flags as it positioned itself as a cheaper substitute for family vacations. They should be in good position for the next year and a half, right?

SIX is currently trading at 41 cents, down from $3.37 a year ago.

It got downgraded by Moody's because the increased cashflow above is not sufficient to cover the two upcoming debt obligations:

The mandatory redemption date for Six Flags' $287.5 million Preferred Income Redeemable Securities, or PIERS, is Aug. 15, 2009. Its remaining $131 million senior unsecured notes mature on Feb. 1, 2010.

In a "normal" recession, perhaps SIX could have refinanced this and debt obligation and stay solvent that way. But this is not normal times, as the credit market has more or less seized up.

And herein lies the danger of the global credit crisis: businesses that otherwise showed legitimate economic growth are shut down because there is no capital flow for them.

This also illustrates, I think, why the time is of the essence in terms of re-capitalizing the banks. There is a market demand for Six Flags; were it to shut down and convert its roller coasters to scrap metal just to pay off its debts, that market demand will go on unmet. It would take years for amusement parks of the same magnitude to replace them, all the while a large economic dislocation in the form of higher chronic unemployment and such.