S&P Global Ratings raised Alterra Mountain Co.’s issuer credit rating from ‘B’ to ‘B+’ due to its improved leverage.
S&P said it believes Alterra Mountain Co. would be able to maintain total leverage well below 6x, even if S&P’s baseline assumption is that the U.S. economy enters a shallow recession. at the beginning of 2023.
Operating performance during the 2021/22 ski season exceeded S&P’s expectations for skier visits, revenue and EBITDA. S&P expects Alterra to report debt adjusted by S&P Global Ratings at approximately 5x EBITDA for fiscal year 2022, ending July 31.
S&P also upgraded its issue-level rating on the company’s secured credit facility by one notch to “B+” from “B” in line with the issuer’s higher credit rating, and revised our recovery rating to “3” from “4”.
The stable outlook indicates that S&P expects Alterra to maintain total leverage below 6x over the next few years, even if a severe weather event results in snowfall and limited visits. Although the company’s high cash balances reduce the risk of increased leverage from leveraged mergers and acquisitions, the ratings upgrade is limited by S&P’s view of Alterra’s majority owners. , the financial sponsor KSL Capital Partners and Henry Crown & Co., which could maintain a more aggressive strategy. corporate strategy and decision-making that prioritizes the interests of majority owners to focus on maximizing shareholder returns.
S&P said in its analysis:
“The upgrade to ‘B+’ reflects our expectation that Alterra will maintain leverage of approximately 5x or less in fiscal 2023, even if a US economic recession reduces attendance and spending resorts. In our updated base case, we expect skier visits and revenue to continue to grow after a strong 2021-2022 ski season that resulted in revenue growth of 55% to 60% over the fiscal year. 2022, ending in July. We expect skier visits and revenue to grow in the low to mid-single digit zone in 2023. While we expect the company to increase the price of its pass products in line with inflation, we believe effective ticket price (ETP) growth will be limited as Alterra generates a higher percentage of visits through its pass products. Increasing the number of visits to Ikon Passes lowers the ETP because passes are sold at a discount before the start of the season compared to same-day ticket purchases. We expect the EBITDA margin to compress slightly in 2023 to between 29% and 30%. Ski operators have seen rising costs, especially for labor, as companies compete for seasonal employees. Although we believe wage pressure has eased compared to 2021 and 2022, we believe the business will increase its workforce ahead of the 2022/23 ski season to maintain service levels in the face of higher attendance. As a result, we expect Alterra to maintain approximately 5x S&P Global Ratings-adjusted leverage through FY2023, lower than its 2019 adjusted leverage, despite approximately $650 million in Term Loan B additional issued during the pandemic. Attendance at Alterra mountain resorts remained high from pre-pandemic levels during the 2021-2022 ski season, even as other forms of entertainment reopened following the easing of COVID-related constraints. We estimate that skier attendance in Alterra’s portfolio of resorts increased by approximately 20% during the 2021-2022 ski season. Due to increased demand, we believe effective ticket prices have remained at historically high levels and roughly in line with 2021 levels, despite a significant increase in the company’s Ikon pass base. Additionally, a return to full activity for its food and beverage operations and its CMH heli-skiing segment contributed to a 66% increase in revenue in the first three quarters of fiscal 2022, ending in July.
“In September, S&P Global economists revised down our base-case forecast for US GDP and consumer discretionary spending in 2022 and 2023 and projected that the US economy will fall into a recession from the first half of 2023 as recent indicators now show cracks in the as the US economy heads into 2023 as rising prices and interest rates eat away at household purchasing power. may be somewhat immune to lower discretionary spending in 2023. Alterra has significantly expanded its Ikon Pass base since the start of the pandemic and, due to the generally high-income demographics of the ski industry , lower pass sales and skier attendance be more resilient during a recession.
“We expect Alterra to fund increased CAPEX and M&A from cash on its balance sheet. in acquisitions and reinvest in its asset base in anticipation of continued increases in skier attendance. As of April 30, 2022, Alterra reported $1.3 billion in cash on its balance sheet, which is significantly more than the company had made in the years before the pandemic. We expect Alterra to end fiscal 2022 with $1.0-1.1 billion of cash on its balance sheet, despite a significant increase in CAPEX and modest M&A activity in the second and third quarters. Alterra conducts most of its capital investment programs during the summer and prior to the North American ski season. Additionally, we expect Alterra to be able to fund continued high CAPEX spending in 2023 and 2024 through the generation of operating cash flow (FOCF). We believe Alterra will maintain high cash levels over the next 12 months for add-on acquisitions and increase its flexibility for mergers and acquisitions without the need for additional debt financing.
“Alterra footfall is vulnerable to declines in consumer discretionary spending. Alterra is vulnerable to declines in consumer discretionary spending, which can reduce company revenue during periods of economic weakness. Given that mountain resort activities often involve a higher than average level of daily recreational spending, compared to more value-oriented alternatives, and the belief of our economists that the United States will enter a recession in the Next 12 months, footfall in the business could decline if consumers pull cuts in travel and leisure spending or choose cheaper alternative entertainment options.
“Alterra’s operating performance may fluctuate depending on weather conditions. Alterra generates approximately 80% of its revenue and over 100% of its EBITDA during the winter months, so having adequate snowfall to sustain attendance is essential. Due to its high fixed cost structure, the company’s operational performance can be volatile during years of low snowfall, which can increase its leverage. This risk is somewhat offset by Alterra’s success in growing its Ikon pass, which provides it with pre-committed revenue ahead of the winter season and reduces risk arising from weather volatility. Alterra seeks to generate a higher percentage of its revenue each year from the sale of its pass products, the majority of which are sold before the start of the season and guarantee revenue for the season. The company has introduced lower price tiers in recent years as well as two-, three- and four-day products that replace lift tickets for less frequent skiers who are more sensitive to the day’s weather conditions. We believe continued growth of the Ikon pass product could indicate substantial customer affinity for the company’s pass products and resort portfolio and significantly stabilize the company’s lift ticket revenue and reduce volatility. revenue and EBITDA.
“Good geographic diversity and scale help mitigate risk. Alterra maintains good market share and geographic diversity as its 15 resorts and 39 Ikon partners are spread across North America, South America, Europe, Australia, New Zealand and Asia. The company’s recent international partnerships include Chamonix Mont-Blanc Valley in France, Lotte Arai Resort in Japan and Panorama Mountain Resort in British Columbia. We view Alterra’s scale and diversity favorably, as the different geographic locations of its resorts slightly mitigate its weather risk and have enhanced the value of its Ikon pass. Additionally, its pre-committed revenue from Ikon pass sales further mitigates its weather-related risks. Additionally, Alterra’s scale and diversity can help mitigate economic risks specific to a country or region.
“The stable outlook indicates that we expect Alterra to maintain its total leverage below 6x over the next few years, even if a severe weather event limits snowfall and visits. The company’s very high cash positions reduce the risk of increased leverage from leveraged M&A activity, the ratings upgrade is limited by our view that the majority owners of Alterra, the financial sponsor KSL Capital Partners and Henry Crown & Co. (a family-run investment firm) could consider a more aggressive strategy and corporate decision-making that prioritizes the interests of majority owners to focus on maximizing returns for shareholders.