Six Flags files for Chapter 11

Sir_LANs-a-lot · Six Flags files for Chapter 11

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http://www.necn.com/Boston/Busine...es-for-Chapter-11/1244911292.html

Andy Hine MBE

No fear for some investors in Six Flags’ wild ride

Six Flags Inc. says operations won’t change in Arlington and its other parks during a reorganization.

Bankruptcy usually wipes out investors, and that’s the fate awaiting shareholders and bondholders of Six Flags Inc., which filed for Chapter 11 bankruptcy a week ago.

Not so, however, for the private investors who still hold a major stake in Six Flags Over Texas, the Arlington amusement park that has a separate ownership structure. This group is still getting millions in annual payouts from the parent company, adjusted yearly for the cost of living, along with a share of extra revenue generated by the park. And if the 100 or so private investors want to cash out some holdings, they just say the word.

They rushed to sell this spring, unloading partnership units worth $52 million by the April deadline, according to a company filing. For the past decade, they had been selling $1 million to $2 million in units a year, a reflection of just how attractive the investment has been.

Not surprisingly, debt-laden Six Flags Inc. didn’t have the cash to buy the units, as required by a sales agreement more than a decade ago. So Time Warner, which owned the Six Flags chain in the 1990s, stepped forward last month and loaned the money, because it guaranteed the original contract.

It’s complicated — and oh-so-sweet if you happen to be part of the investor group that struck the deal on the Arlington park. The parent company bought a 33 percent stake in 1998, but investors retained the rest, along with voting control. Investors got top dollar, with the sale valued at $375 million, and they chose to spread the payouts over the following 30 years.

The group negotiated an annual distribution of 9 percent that rises with inflation, a payment that totaled about $36 million last year. Investors can also liquidate a portion of their holdings every year. In 2028, Six Flags Inc. will have the option to purchase the remaining units at the original sales price, plus an inflation adjustment.

In effect, the selling group agreed to take a corporate IOU, with a hefty dividend and other upsides. It was a great deal a decade ago, when the economy and stock market were rolling, and it looks positively brilliant in today’s sluggish times — as long as it holds up.

In addition to Six Flags Over Texas, the owners of Six Flags Over Georgia and a nearby water park sold their parks in a similar partnership structure. The complex arrangements are detailed in Six Flags’ annual filings with the Securities and Exchange Commission.

Jack Knox of Dallas is managing director of the investor group that still owns almost half of Six Flags Over Texas. Knox’s group bought the park about 40 years ago, after founder Angus Wynne suffered steep real estate losses. The group had 220 limited partners in 1998 and about 100 remaining partners today. At one time, most of the investors lived in California, Georgia and New York, and the group included actress Mia Farrow, according to Star-Telegram clips.

The unusual sale arrangement has several advantages, starting with insulating the Texas and Georgia parks from the bankruptcy process. Six Flags Over Texas was excluded from last week’s Chapter 11 filing, and the parent company was prohibited from using it as collateral, so it doesn’t appear to be vulnerable to claims by creditors.

If the court forces the parent to sell a park or two, Arlington won’t be on the list.

Bankrupt companies often say that operations won’t change after a reorganization, and Six Flags Inc. in New York is offering the same assurances. They carry more weight than usual for Arlington. Besides its separate ownership, the partnership deal requires that at least 6 percent of annual park revenue be spent on capital improvements, a threshold that has been met easily in past years.

For the Texas limited partners, the deal generates steady income and could reduce taxes. It also offers more options for estate planning. But the approach carries a risk: What if the buyer runs out of money?

The Texas partnership considered that scenario, because a previous corporate parent had flirted with bankruptcy in the early 1990s. The problem then was much like today: too much debt.

The savvy move by the Texas group was to spread out the financial obligation. In addition, the sellers required that Time Warner remain on the hook. The media giant had come to the rescue of the Six Flags chain in the early ’90s, in part because its cartoon characters were a fixture at the parks.

Buying partnership units had never been an issue for the parent company, because units were rarely offered. It’s hard to find an investment with a 9 percent return that adjusts for inflation. But this spring, investor sentiment shifted.

Investors in the Georgia partnership wanted to sell $14 million worth of units. The Georgia group bought half, as permitted under the agreement, and Six Flags Inc. used escrow funds to buy the remaining units.

The Texas sale was too big to handle alone. Time Warner loaned the parent company $53 million at an annual interest rate of 14 percent. Six Flags Inc. expects to pay back the loan in two to three years, using the yearly dividends from all its ownership units, which now total a bit more than 50 percent of the Texas partnership.

Creditors may want a piece of that action, but Time Warner structured the ownership shares to be separate and free from such claims. In fact, Time Warner, not Six Flags Inc., owns the partnership units and uses a legal framework to assign them to the parent.

For investors in the Texas partnership, the deal seems bulletproof, as long as Time Warner is solvent and the structure holds up legally. But there is some risk, because creditors typically make a claim against every asset, and the annual distributions might be challenged in court.

That probably explains the rash of sell orders this spring. It’s also likely that some investors needed the money after the stock market cratered. And that some chose to take profits now, using stock market losses to offset their Six Flags capital gain.

Whatever the reason, for them all the choices were good. For investors in Six Flags Inc., the results couldn’t be much worse.