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Mathieu Guerin, director sites operation at Cirque de Soleil checks the lines on the tent at the Old Port in Montreal on May 13, 2020.Christinne Muschi/The Globe and Mail

A fresh financial assessment of Cirque du Soleil is puncturing optimism for its rebound, with the live entertainment company given a debt rating that is deep in junk territory despite fresh capital from new owners.

Moody’s Investors Service has assigned a Caa1 rating to Cirque du Soleil’s recapitalized corporate profile, one of its lowest levels possible, and also classified the company’s outlook as negative. The assessment shows the depths of Cirque du Soleil’s financial hole as it re-emerges from creditor protection under new ownership, despite optimism that COVID-19 vaccines will revive live entertainment in the coming months.

Moody’s cited a number of concerns, including uncertain timing for restarting shows, weak liquidity and high debt, and a “substantial concentration” of Cirque du Soleil’s business in Las Vegas.

“Cirque du Soleil will remain exposed to social risks arising from the coronavirus outbreak during 2021 as it pertains to the health of employees and audiences as it ramps up shows beginning in [the second quarter],” Moody’s analysts wrote in their review. “Other ongoing social risks include the company’s exposure to shifting demographics and consumer preferences combined with the relatively high-priced, highly-discretionary nature of its shows.”

By comparison, last month Moody’s downgraded Air Canada (AC), which has also suffered severely from the pandemic. However, the airline’s new debt rating is ‘Ba3,’ four notches above Cirque.

Cirque’s speculative debt rating counters the optimistic vision its new owners, led by private equity firm Catalyst Capital Group Inc., have put forward. Catalyst hopes to restart live shows as early as next spring and to also add revenues from a new digital offering that could stream Cirque shows and other branded content.

In an e-mail, a spokesperson for Cirque characterized the rating “as expected in the current environment where the timing of relaunching our shows is hard to predict,” adding the company now has sufficient liquidity to get ready for the restart of operations.

Cirque filed for creditor protection in June and fell under new ownership in August following an offer from Catalyst and a group of roughly 15 other senior creditors valued at about US$1.2-billion. Catalyst emerged as the lead bidder after buying some Cirque debt this spring at a deeply discounted price.

The hope is that Cirque will rebound in a similar fashion to AirBnB Inc. (ABNB), which moved to raise US$2-billion in emergency funding when the pandemic erupted this spring. The vacation rentals company went public last week and watched its shares soar 105 per cent over their first two days of trading, valuing the business at US$83-billion as investors bet on a recovery.

At the moment, Moody’s is concerned about Cirque du Soleil’s debt level, which amounts to 10 times its earnings before interest, taxes, depreciation and amortization. The company is also expected to report negative free cash flow through 2022.

Cirque du Soleil will have an estimated $160-million in cash available at the end of this year, according to Moody’s, but the rating agency expects a minimum working cash balance of about $10-million by early 2022, leaving little room for error if there are deviations to Cirque’s business plan or postponements of show revenues.

The rating agency is also worried that shows in one city, Las Vegas, will account for almost half of the company’s EBITDA in 2022. Before the pandemic, the Cirque counted on its partnership with MGM for about 35 per cent of its US$950-million annual revenue.

This specific concern is at odds with management, which has signed commitments to extend existing Las Vegas performance contracts by another nine years with casino operator MGM Resorts and another 10 years with Phil Ruffin’s Treasure Island hotel and casino.

Montreal-based Cirque’s first experience with private equity ownership ended badly after TPG Capital, China’s Fosun International and the Caisse de dépôt et placement du Québec bought the company in 2015 from founder Guy Laliberté. After using debt to fund the purchase, the backers then borrowed even more money to launch new shows and acquire productions such as the Blue Man Group. Profit did not rise as expected, leaving Cirque heavily indebted when the pandemic hit.

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