We live in a debt-fueled economy. That is not a good thing, but Ben Bernanke, Paul Krugman, and a host of other economists think it is. I have talked about household debt and public (government) debt, but I've never discussed private (corporate or small business) debt, a situation I want to rectify today.
Let's look at the latest SeaWorld/Blackstone "dividend" deal. The Deal's David Holley gives us the details in Blackstone extracts another dividend from SeaWorld. The acronym "ebitda" stands for Earnings Before Interest, Taxes, Depreciation and Amortization.
SeaWorld Parks & Entertainment Inc. is paying a sponsor group led by Blackstone Group LP a second dividend in nine months: a $500 million distribution through a $500 million add-on to its existing term loan, which was made public late Tuesday, March 13.
Add that to the $100 million distribution Moody's Investors Service said SeaWorld paid Blackstone in the third quarter of 2011, and at $600 million Blackstone is nearly two-thirds of the way to regaining the $975 million in equity it injected into the $2.4 billion leveraged buyout of SeaWorld, then known as Busch Entertainment Corp.
Ratings agencies remain cautious about Blackstone's push to regain its equity stake through distributions. Moody's lowered Orlando, Fla.-based SeaWorld's corporate family rating and probability of default rating from Ba3 to B1, estimating SeaWorld's debt-to-Ebitda leverage is 5.5 times for 2011.
"The magnitude of the distributions and the resulting higher leverage profile over the next several years are above the levels factored into the prior corporate family rating," Moody's wrote in a March 13 note.
Standard & Poor's downgraded SeaWorld to a B+ from BB- corporate rating.
SeaWorld's existing loans, which came onto its books after the Blackstone leveraged buyout in 2009, are coming due in 2016 or 2017. They include a $172.5 million revolver, a $160 million term loan A and an $844 million term loan B, according to the ratings agencies. The $500 million add-on will increase the term loan B to $1.344 billion, which is due in August 2017.
Bank of America Merrill Lynch, Barclays Capital, Deutsche Bank AG, Goldman, Sachs & Co., J.P. Morgan Chase & Co. and Macquarie Group Ltd. launched the add-on Tuesday afternoon, with an issue price of 98.75-99, according to a source. The add-on has the same pricing terms as the original term B loan, at LIBOR plus 300 basis points, with a 1% LIBOR floor, the source said. The lead banks are offering a 15-basis-point consent fee, the source said...
Blackstone bought SeaWorld from beer giant Anheuser-Busch InBev NV. Blackstone did not return a request for comment.
There have been a rash of these "dividend" deals lately, as reported by Holley in In hot debt market, buyout shops harvest dividends and Bruce Krasting in Bernanke: "I want to bring back irrational exuberance".
If you didn't quite follow Holley's report, which is full of complications like "term A/B loan", "B+ corporate rating" and "LIBOR plus 300 basis points, with a 1% floor", don't worry about it. Let's boil all this down to its simplest (and most important) interpretation. Blackstone Group bought SeaWorld through a leveraged buyout, which means they borrowed money to acquire them. Now they want their money back. Thus SeaWorld Parks & Entertainment Inc., through the good graces of Bank of America Merrill Lynch, Barclays Capital, Deutsche Bank, Goldman Sachs and J.P. Morgan Chase, is borrowing money to make a $500 million payout to Blackstone Group. In the famous phrase of Goldman CEO Lloyd Blankfein, these banks are doing God's Work. And Blackstone is looking to recoup its debt-fueled "investment" in SeaWorld.
In short, SeaWorld must pay for the privilege of being owned by Blackstone.
Now let's ask some simple questions. Will this new debt fuel an expansion of SeaWorld? No. (Not that the world needs an expanded SeaWorld, or even SeaWorld itself, but let's pretend it does.) Will this new debt create jobs at SeaWorld? No. How does this new debt benefit SeaWorld itself? It doesn't. Who are the sole beneficiaries of this "dividend" deal? They are Blackstone Group, Bank of America, Barclays and the other big banks who financed the deal. That is why Holley entitled his article Blackstone extracts another dividend from SeaWorld.
It's a damn good thing Americans are still flocking to SeaWorld because otherwise all those running the parks and tending the cute killer whales would lose their jobs.
SeaWorld may have generated enough growth to sustain this lifestyle. S&P said that, based on preliminary results, revenue grew 9.6% in 2011, while Ebitda grew 18.3%. The company's trailing 12 month revenue was $1.3 billion for the period ended Sept. 30, 2011, according to Moody's.
Bruce Krasting has another take on all these debt deals.
On balance, I think that Bernanke is delighted with these results. He wants the Fed's cheap money to fund this type of financial activity. When debt is used to pay dividends, it creates equity from debt...
I'm still puzzling over how one creates "equity from debt," but nevermind.
When the likes of GE and Wayzata have more (paper) equity, they can borrow more, and do more deals. Ben loves it when financial players do deals. He believes that creating financial wealth for GE ends up creating jobs. But there is also a cost...
Another credit bubble is forming. Credit quality is deteriorating, while financial engineering is back in vogue. The Fed keeps making the same mistake of fueling these bubbles. It is celebrating this process as a “success” while at the same time it is sowing the seeds for another bust. Does the Fed really think Americans are better off if Blackstone receives another $500 million dividend?
The problem is, that is exactly what it believes.
Yes, that is exactly what The Bernank believes. This is Your Economy At Work. You should "enjoy" it while it lasts. And be sure to do your part, don't slack off. For God's Sake, whatever you do, don't stop going to SeaWorld—they've got a boatload of debt that needs servicing.
Bonus Video — Believe At SeaWorld Orlando