Companies across the pandemic-battered travel and leisure industries are starting to see signs of life as the U.S. economy reopens, but default risks for those businesses remain elevated.

Median probability of default scores for U.S. restaurants, hotels, cruise lines, leisure facilities and casinos remain at or near highs reached following the emergence of COVID-19 and restrictions that largely shut down companies in these industries, according to S&P Global Market Intelligence data. The scores represent the median odds of default on debt within a year within an industry, based on financial reports over the past 12 months for public companies that trade on major U.S. exchanges and account for different macroeconomic factors.

The scores illustrate the uphill climb that many companies face to fully recover from the effects of the pandemic and the uncertainty that surrounds many industries still struggling to operate in changing conditions.

"As the economy started to open up, these travel and leisure industries did benefit," Luka Vidovic, an associate director in the analytical development group at Market Intelligence, said in an email. "However, the last 12 months left a significant negative impact on their financials, and credit scores are, thus, still elevated, but also slowly recovering."

Compared to their pre-pandemic financials, travel and leisure companies typically have sales declines, losses, higher debt and higher costs to service that debt, Vidovic said. Recovery largely depends on the stringency and duration of government restrictions and how companies adapt to those rules, Vidovic said.

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While there was a broad acceleration in May spending in U.S. restaurants, travel and leisure industries compared to the prior month and May 2019, some industries are recovering faster than others, Lili Meng, Earnest Research senior data analyst, said in an email. The two-year comparison reflects overall growth in the industries despite the pandemic-related downturn in 2020.

Restaurants

Pandemic-related closures dealt heavy blows to sales across the food service industry, while staffing and rising commodity prices continue to challenge many restaurants, experts say.

Quick-service and fast-casual companies such as McDonald's Corp. and Chipotle Mexican Grill Inc. largely have recovered to pre-pandemic revenue levels, though full-service companies have yet to catch up, said Erik Herrmann, a partner and head of the restaurant investment group at CapitalSpring. Competition has also thinned for the largest chains as many independent restaurants closed permanently, Hermann said.

"You're just going to see this widening, in our view, of the haves and have-nots," Herrmann said in an interview. "I think we're entering a golden age of the chain restaurant in the coming years."

Among publicly traded U.S. restaurant companies, Potbelly Corp. reported the highest one-year probability of default at 28.1% as of June 15. A loss before interest and taxes of $56.8 million for the 12 months through March 31, a reflection of ongoing operating losses that began in the first quarter of 2020, influenced the company's score, according to Market Intelligence data.

Potbelly did not respond to requests for comment.

Hotels and casinos

As the economy reopens, leisure travel is helping fuel recovery for hotels after the pandemic crushed visits, said Ari Klein, a U.S. real estate analyst at BMO Capital Markets. A key question for the hotel industry is whether business travel will return to pre-pandemic levels after companies had a year to get used to doing more video calls and enjoy the savings from fewer business trips, Klein said.

"Things have improved quite a bit but it's still not anywhere close to being back to normal," Klein said in an interview.

Among hotel operators, Hilton Worldwide Holdings Inc.'s odds of defaulting within a year were highest at 16.1% as of June 15, according to Market Intelligence data. Hilton's $1.62 billion of negative equity on the company's balance sheet as of March 31 was the most significant factor to Hilton's score.

Hilton rejected the results of Market Intelligence's default model, a spokesperson said in an email. Since the start of 2020, the company raised $4.4 billion in debt, $3.4 billion of which was used for refinancing, lowered the weighted average interest rate and average maturity for its debt, the spokesperson said.

Additional actions taken by the company unrelated to capital markets added $1 billion to the company's balance sheet, the spokesperson said. In its most recent earnings, Hilton reported $2.95 billion in liquidity — $2.45 billion in cash and an additional $500 million in revolver capacity — as of March 31.

Among casino operators, Wynn Resorts Ltd. has trailed the recovery of many of its peers, with higher odds of defaulting in a year at 23.9% as of June 15, according to Market Intelligence. Wynn's negative total equity carrying on its balance sheet is the most significant financial factor influencing its score, at negative $202.9 million as of March 31.

Wynn Resorts' Michael Weaver, chief communications and brand officer, refuted Market Intelligence's analysis, calling it "misleading at best and factually inaccurate at worst."

Weaver said in an email that Wynn has strong liquidity and a long-dated bond maturity profile, with the nearest bond maturity date in 2023. The company's $4 billion in total cash and available liquidity as of March 31 is "more than enough liquidity to fund our operations, working capital and capex needs for the foreseeable future," Weaver said.

Wynn Resorts has accessed both debt and equity markets at attractive costs to raise $4.8 billion over the past 18 months, Weaver said, adding that the company is also benefiting from the reopening of the economy, which is easing pressure on Wynn's liquidity.

"Defaults occur when a business isn't well capitalized with ample liquidity, and that is clearly not the case with Wynn Resorts," Weaver said.

Weaver also highlighted the discrepancy between Wynn's BB- credit rating from S&P Global Ratings — which was last reviewed in April — and the company's implied credit score of "ccc" based on its probability of default score. The implied score is mapped to the company's probability of default score and not interchangeable with credit ratings issued by Ratings. Lowercase nomenclature for implied credit scores is used to differentiate the implied scores from ratings issued by Ratings, which does not participate in the creation of implied credit scores.

Cruise lines

The pandemic had a devastating impact on the cruise industry, which saw dramatic revenue declines in 2020 after operations were suspended, experts said.

Cruise operator Lindblad Expeditions Holdings Inc. had an 18.2% chance that it could default within a year as of June 15, the highest score among cruise lines that trade on major U.S. exchanges. Factors that contributed to Lindblad's high score stemmed from a 99.1% decline in revenue to $2.9 million for the 12 months ended March 31, in conjunction with a loss of $121.3 million before interest and taxes, according to Market Intelligence data. The company did not respond to requests for comment but reported in its first-quarter earnings that COVID-19 and related voyage disruptions, cancellations and reschedulings hurt its results.

Cruise lines are on course to get back to pre-pandemic levels by 2022 as companies benefit from pent-up demand and deal with supply restrictions, said Landon Luxembourg, a Third Bridge senior analyst, in an interview. During the pandemic, cruise lines tried to shore up cash by offering free perks to people who bought tickets for future trips, but as demand has picked up those incentives have gone away, Luxembourg said.

"The expectation is that there's going to be a lot of demand that the industry won't be able to meet," Luxembourg said.

Leisure facilities

Theme parks shut down when the pandemic hit but have begun to reopen.

Consumers are planning more activities that should benefit leisure facilities like Six Flags Entertainment Corp., but uncertainty about the length of pandemic precautions remains a risk, William Blair analysts led by Sharon Zackfia said in a June 8 note. As of the company's April 28 earnings release, Six Flags planned to open all but one of its 27 parks by the end of May.

The odds that Six Flags could default in a year were 30.8%, according to Market Intelligence. A drop in EBIT caused the largest impact to its high score, at a loss of $333.7 million for the 12 months ending April 4. Six Flags did not respond to requests for comment.