Large crowds, long lines, and dirty surfaces -- an amusement park isn't the best place to be during a global pandemic. And coronavirus fears are a big part of the reason Six Flags Entertainment (NYSE:SIX) has dramatically underperformed the market over the last three months. Shares have fallen over 71% year to date, far surpassing the 25% decline of the S&P 500 over the same period. 

Six Flags looks set to continue underperforming the market as the U.S. sees a rapidly growing number of cases. The company has not yet updated its guidance to account for state-mandated lockdowns in 2020. Meanwhile, its long-term debt levels are becoming dangerously high in the face of deteriorating cash flow.

Six Flags at Sunset

Image source: Getty Images.

A failed Chinese expansion

Six Flags was in trouble before the coronavirus pandemic started making global headlines. In the fourth quarter of 2019, the amusement park operator reported unrelated setbacks with its Chinese partner, Riverside Investment Group.

Six Flags planned to work with Riverside to develop branded theme parks in Chongqing and Zhejiang, China. But these plans fell through when Riverside defaulted on promised royalty payments due to a worsening macroeconomic environment in the country. This was before China felt the full impacts of the coronavirus pandemic itself, so Six Flags may report further setbacks in the first quarter. In a Jan. 10 filing, the company revealed that, in the worst-case scenario, challenges in the region could lead to "the termination of all the Six Flags-branded projects in China". The pandemic makes the worst-case scenario more likely.

Six Flags recorded $97.4 million in revenue from sponsorships, accommodation, and international agreements (including Chinese projects) in full-year 2019. This number fell from $100.1 million in 2018 and represents around 7% of revenue.

Lackluster fourth-quarter performance

Six Flags' North American business started showing signs of weakness in the fourth quarter of 2019. And the coronavirus pandemic will probably ensure poor performance for the entirety of 2020.

Quarterly revenue fell year over year from $269.5 million to $261.0 million. This 3% decline was driven by lower park attendance in North America. On the bottom line, net income made a complete reversal from $79.4 the prior year to a loss of $11.2 million as a result of higher stock-based compensation expenses and the problems in China. The company's 2020 guidance projects the weakness will continue in 2020, but it is still far too optimistic. 

Overoptimistic guidance

On Feb. 20, Six Flags guided for adjusted EBITDA to come in between $435 million and $465 million 2020, compared to $527 million in 2019. While this would represent a 17.5% year-over-year decrease at the bottom of the range, it doesn't take into account the full headwinds from the coronavirus.

Note that Six Flags joined other theme park operators and temporarily closed some of its parks in the U.S. on Mar. 13 This comes after several state governors, including the governor of California, issued statewide restrictions on movement to slow the spread of coronavirus.

Six Flags hopes it can reopen the parks in April, but as the pandemic spreads across the U.S., these lockdowns could last far longer than management is projecting, making Six Flags' guidance impossible to meet. According to analysts at Oppenheimer, Six Flags' parks will probably be closed until the beginning of July. The firm believes the company's 2020 adjusted EBITDA will fall to just $150 million.

High debt levels a cause for concern

Six Flags' heavily leveraged business model makes its deteriorating cash flow especially troubling.

The company reported $2.3 billion in long-term debt at the end of 2019 as well as around $113 million in interest expense for the year. A dramatic fall in 2020 EBITDA will make it harder for the company to comfortably meets it debt obligations while also funding the planned capital expenditures and a quarterly dividend that will pay out $85 million this year at $0.25 per share.

With no significant debt maturities until around 2024, Six Flags is unlikely to go bankrupt. But its strained cash flow situation may lead to another dividend cut or reduced capital expenditures, which will suppress future growth. Overall, Six Flags will have a hard time coming out of the coronavirus pandemic unscathed.