TEXT-S&P rates AGS Holdings

Thu Apr 19, 2012 10:40am EDT

(The following statement was released by the rating agency)	
    Overview	
    -- U.S. electronic gaming machine manufacturer and operator AGS Holdings 	
announced plans to issue $150 million in new senior secured notes, the 	
proceeds of which it will use primarily to refinance its existing credit 	
facility.	
    -- We are assigning the proposed notes our preliminary 'B-' issue-level 	
rating with a preliminary recovery rating of '3'.	
    -- We are also assigning AGS Holdings our 'B-' corporate credit rating 	
with a negative rating outlook.	
    -- The negative rating outlook reflects our belief that the company is 	
reliant on additional financing sources that have not yet been committed to 	
fund costs likely to be incurred for growth initiatives in Illinois and higher 	
interest expense from the proposed transaction.	
	
Rating Action	
On April 19, 2012, Standard & Poor's Ratings Services assigned Henderson, 	
Nev.-based AGS Holdings LLC its 'B-' corporate credit rating. The rating 	
outlook is negative. 	
	
At the same time, we assigned our preliminary 'B-' issue-level rating with a 	
preliminary recovery rating of '3', indicating our expectation of meaningful 	
(50% to 70%) recovery for lenders in the event of a default, to the company's 	
proposed $150 million senior secured notes due 2017. We will finalize the 	
rating upon review of final documentation of the notes. The company plans to 	
use proceeds from the proposed notes, along with a $30 million equity 	
contribution from its sponsor Alpine Investors, to repay its existing credit 	
facility (which had a balance of approximately $131 million at Dec. 31, 2011), 	
buy out the existing Bluberi Gaming Technologies distribution agreement (about 	
$23 million), repay a portion of holding company notes (about $9 million), and 	
pay fees and expenses.	
	
While not yet committed, AGS also plans to enter into a new $20 million 	
revolving credit facility some time after the closing of the proposed senior 	
secured notes transaction, and we have factored this into our recovery 	
analysis. Absent the addition of a revolving credit facility, our expectation 	
of recovery on the senior secured notes improves to the high end of the 50% to 	
70% range and the recovery rating would remain a '3'. (For the recovery 	
analysis, see Standard & Poor's recovery report on AGS Holdings, to be 	
published on RatingsDirect as soon as possible following the release of this 	
report.)	
	
Our existing ratings, including our 'B-' corporate credit rating and negative 	
rating outlook, on AGS LLC, a wholly owned subsidiary of AGS Holdings LLC and 	
the borrower under the current credit facility, remain unchanged. In the event 	
AGS successfully closes the proposed financing, we expect to withdraw our 	
corporate credit and issue-level ratings on AGS LLC.	
	
Rationale	
While the proposed transaction eliminates near-term debt maturities and the 	
company's need to meet restrictive covenants contained in the current credit 	
agreement, the 'B-' rating and negative rating outlook reflect our belief that 	
AGS' liquidity position could remain pressured over the intermediate term. The 	
terms of the proposed notes allow for a $20 million revolving credit facility; 	
however, commitments for that facility are not currently in place. We expect 	
the company will need to make significant capital expenditures related to 	
growth opportunities in Illinois over the near term before the expected return 	
on these growth initiatives is realized. In addition, AGS' interest burden 	
under the proposed notes will increase meaningfully. Therefore, we believe 	
that the company's ability to maintain a liquidity profile sufficient to 	
pursue these growth initiatives and meet an increased level of fixed charges 	
over the intermediate term relies on putting into place the incremental 	
financing. 	
	
Our 'B-' corporate credit rating on AGS reflects our assessment of the 	
company's business risk profile as "vulnerable" and our assessment of its 	
financial risk profile as "highly leveraged," according to our criteria.	
	
Our assessment of AGS' business risk profile as vulnerable reflects the 	
existence of formidable competitors, including International Game Technology 	
and Bally Technologies with much broader product offerings, a dependence on 	
Oklahoma for a substantial portion of its revenues, and its concentrated 	
customer base. Somewhat tempering these factors are the company's strong 	
position in the Oklahoma gaming market, which provides AGS a somewhat more 	
stable source of revenue over the longer term given that its contracts are 	
generally multiple years in length and are often renewed, and a relatively 	
good EBITDA margin. Our assessment of AGS' financial risk profile as highly 	
leveraged reflects relatively high debt leverage, our expectation that free 	
operating cash flow (cash flow from operations less capital expenditures) will 	
be negative over the next few years, and our belief that the company relies on 	
putting into place additional financing to pursue growth initiatives and fund 	
increased interest expenses resulting from the proposed notes transaction.	
	
For the full year 2011, AGS underperformed relative to our 2011 revenue 	
expectations, with revenue falling in the low-single-digit percentage area. 	
(AGS is a private company and does not publicly disclose financial 	
statements.) We previously anticipated a stabilization of equipment sales and 	
single-digit percentage growth in gaming revenue in 2011. We expected revenue 	
in both segments to benefit from an increase in AGS' installed base and 	
expansion into new markets, including Illinois, which we now believe will 	
occur in 2012. Despite the revenue underperformance, EBITDA for the full year 	
2011 was in line with our overall expectation of modest single-digit growth, 	
mainly because of a decrease in commission and sales salary costs. In 2012, we 	
expect AGS to experience revenue growth in the low-single-digit percentage 	
area and EBITDA growth in the mid-teens percentage area, reflecting our 	
expectation for increases in AGS' installed base of games, our slightly 	
positive outlook for the U.S. gaming industry, and a reduction in operating 	
expenses associated with the buyout of the Bluberi Gaming Technologies 	
agreement. The buyout will eliminate the royalty fee paid to Bluberi Gaming 	
Technologies and, therefore, we expect AGS' EBITDA margins to improve slightly 	
over the near term.	
	
AGS designs and operates electronic video bingo machines, primarily marketed 	
for placement in casinos operated by Native American tribes. The company 	
maintains an installed base of over 7,000 machines in more than 100 casinos. 	
Despite diversification across multiple facilities, the business focus is 	
narrow, with a significant percentage of recurring revenue from machines in 	
the Oklahoma gaming market. In addition, AGS' revenue base is highly 	
concentrated, with one customer representing about one-third of recurring 	
revenues. AGS is majority owned by Alpine Investors, a private-equity sponsor.	
	
Liquidity	
Based on its likely sources and uses of cash over the next 12 to 18 months and 	
incorporating our performance expectations, AGS has a "less than adequate" 	
liquidity profile, according to our criteria. Given management's planned 	
growth initiatives and an expected increase in interest costs associated with 	
the proposed notes transaction, we believe AGS will rely on an incremental 	
revolving facility, which has not yet been committed. While the company 	
expects to enter into a new revolving credit facility in the near term, we 	
believe that having a committed facility in place is necessary for the company 	
to possess an "adequate" liquidity profile. In addition, we expect the new 	
facility will contain certain financial maintenance covenants. We would need 	
to analyze the proposed new covenant levels to assess if the covenant cushion 	
is sufficient to provide AGS with ample availability under our performance 	
expectations prior to concluding that the company's liquidity profile is 	
adequate.	
	
Outlook	
Our rating outlook is negative, reflecting our belief that, assuming AGS is 	
successful in closing on the proposed notes, the company remains reliant on 	
putting into place incremental financing to maintain a liquidity profile 	
sufficient to pursue growth initiatives and meet an increased level of fixed 	
charges over the intermediate term. 	
	
We could revise the rating outlook to positive once a revolver is put into 	
place, assuming the terms of the revolver provide the company with ample 	
availability to meet cash expenditure needs based on our performance 	
expectations. Rating downside could result from performance meaningfully below 	
our expectations and/or if we view the cushion relative to covenants under the 	
expected new credit facility as insufficient. Additionally, ratings downside 	
could result from the inability to close on the proposed notes.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 	
Credits, May 13, 2008	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008	
	
Ratings List	
AGS Holdings LLC	
New Rating	
                                        To	
Corporate Credit Rating                 B-/Negative/--	
	
AGS Financing Corp	
AGS Holdings LLC	
 Senior Secured                         B-(prelim)                 	
 Senior Secured                         3(prelim)                  	
	
 (Caryn Trokie, New York Ratings Unit)
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