This is the biggest crisis they’ve seen. If you look back at the global financial crisis, it was largely a banking crisis. These companies were probably too highly levered, and when liquidity became scarce, they ran into trouble. Ultimately Six Flags Entertainment (ticker: SIX) went through bankruptcy. Cedar Fair (FUN) had to cut its dividend, but it was able to recover. This is a very different animal. This is the first time that I remember that these companies were shut down for a period of time.

On when the parks might reopen:

I don’t think anybody, including the theme park executives, knows how long they’re going to have to keep their businesses afloat without having the parks open. The outward messaging includes optimism—you know, May time frame [for reopening], maybe June —but I think behind the scenes they’re trying to insulate their businesses to handle a much longer shutdown. I think they’re at least preparing for a scenario in which theme parks don’t open this year. I think that’s seen as more of a worst case scenario, but I think that’s at least on the table right now.

On how theme parks compare:

If you think about destination theme parks, they’re dealing with a double whammy. In addition to people not feeling comfortable being around big crowds right now, a lot of the customers going to a SeaWorld in Orlando, or certainly Disney World or Universal, would need to get on an airplane first. With regard to the regional theme parks, the vast majority of their customers are driving. Cedar Fair, pretty much all of their parks are what I would call regional. I’ve got to think that 90%-plus of the people that come to their parks are driving there.

On solvency for regional theme parks:

The first issue that they’re going to run into is their financial covenants. These are highly levered businesses. When you borrow, there are typically stipulations that you have to maintain. The problem with that is when your parks are shut down, your debt doesn’t change, but your profits go down dramatically. So the first order of business, I think, is going to be renegotiating these covenants. By my math, I think they would run into some issues for Cedar Fair and Six Flags probably by the end of June and for SeaWorld Entertainment (SEAS) probably by the end of July.

I do think their lenders are highly motivated to negotiate at this point. They don’t want to be owners of theme parks.

The second issue would be a liquidity issue. At some point cash becomes a cash issue. Let’s say these parks don’t open in June or July. They’ve still got payroll, maintenance, and upkeep. They’ve got payments on existing debt. They’ve got capital expenditures that they’re contractually obligated to pay. Obviously they’re going to eliminate as much of those costs as they can. But eventually these guys are going to have to take on new debt. I think if they were to secure new debt, interest rates are probably going to be really high.

On rating Cedar Fair at Outperform:

Their momentum before this pandemic was the best of the three [including SeaWorld and Six Flags]. They’re probably best positioned after the pandemic. It still means they have to make it through. I think the current moment is as risky as it has ever been.

On how cruise lines compare:

Cruise lines are definitely in worse shape. For starters, the ability to really ramp down costs is more challenging. Even though the cruise industry is essentially shut down , the ships are still there. They’re still drawing power. They still have a skeleton crew on board. The companies still have ships on order. But I think more to the point is, people associate coronavirus with cruises. You have a number of very high profile incidents where people were on cruise ships and, and they tested positive, and they wouldn’t let them off, and more people caught the virus. It was a public relations disaster.

I think it’s going to be an extended period of time before consumers, certainly in the numbers that we saw, are comfortable getting back on cruise ships. Until there’s a vaccine, I don’t think the cruise industry can go back to normal, whereas there’s a scenario in which you could get at least some semblance of normality in theme parks without a vaccine.

On rating Royal Caribbean and Norwegian at Outperform:

It’s not dissimilar from what we talked about with Cedar Fair. With the cruise lines, they’re beaten up even more than the theme parks. It’s really a binary investment decision you’re making. If you think that the cruise lines are going to make it, that they’re not going to end up in some sort of bankruptcy or restructuring, then the stocks are going to work because they’re down 70%, 80% in some instances.

That is telling you that people aren’t sure they’re going to make it. If they do make it, they’re going to be two or three times the current valuation a year from now. But the risk is bigger than it has ever been.

On the solvency of cruise lines versus regional theme parks:

[Cruise lines are] better capitalized. They carried more cash and had more borrowing capacity before any of this happened. A lot of that is just a function of the fact that they’re a lot bigger. The flip side is they also spend a lot more.

On lasting changes:

I think there is a real possibility that the cruise industry has been permanently impaired. There’s a segment of the population that even once we have a vaccine will be hesitant to ever get on a cruise ship. Just based on all of these headlines that we’ve seen and just this latent fear that you’re going to be somehow stuck, not able to come back to your home country, that there would be some sort of a viral outbreak, even if it’s not coronavirus.

For theme parks, I don’t have that concern. I’d be surprised if 2022 wasn’t a record year for a lot of these parks. I think people are very much going to go back to normal in that respect in much the same way that I have a high degree of confidence that the travel industry in general will be just fine. People are going to be traveling to Orlando and traveling to Europe and traveling to California and traveling through the Caribbean. I think there’s so much momentum in terms of people’s desire to see the world, that I don’t think the coronavirus is going to impair that long-term.

To read the article at Barron’s, click here.