TEXT-Fitch affirms Boyd Gaming Corp

Mon May 21, 2012 9:53am EDT

May 21 - Fitch Ratings affirms Boyd Gaming Corp.'s (Boyd) Issuer 	
Default Rating (IDR) at 'B' following the company's announced plan to purchase 	
Peninsula Gaming Corp. (Peninsula) for $1.45 billion in total consideration. The	
ratings on Boyd's senior secured credit facility and the company notes are also 	
affirmed (see full list of rating actions at the end of the release). The Rating	
Outlook remains Negative.	
	
Fitch views the transaction as largely credit neutral for Boyd in the near term,	
as the slight increase in leverage from the $200 million in incremental revolver	
borrowing to fund its cash contribution is offset by management fees paid to 	
Boyd from the Peninsula unrestricted subsidiary.	
	
The transaction is positive over the medium term, if Peninsula's assets become 	
part of the restricted group as part of a larger refinancing transaction. A 	
transaction to bring Peninsula into the restricted group would address some of 	
Fitch's previously stated concerns incorporated into Boyd's Negative Outlook 	
(see commentaries dated Oct. 26, 2011 and Nov. 3, 2011). As a result, a 	
refinancing transaction of this nature would provide support to revise Boyd's 	
Outlook to Stable.	
	
Material uncertainties to be determined include the terms of the Peninsula 	
management contract and restricted payments basket. Additionally, the 	
contemplated $50 million draw on Boyd's revolver and the $150 million 	
incremental loan would pressure compliance with the senior secured leverage 	
covenant. 	
	
Fitch views the announced financing package as committed backstop financing, so 	
the executed structure and terms may differ depending on market conditions and 	
investor response. Management is noncommittal about the potential to issue 	
equity to help fund the transaction. 	
	
Including the incremental debt and estimated management fees, Fitch calculates 	
Boyd's latest 12-month (LTM) pro forma leverage increases from approximately 	
7.9x to 8.0x as of March 31, 2012. This annualizes IP casino EBITDA and includes	
pre-opening expenses related to Echelon run-rate costs.	
	
The transaction will be all debt-funded with about $1.2 billion raised at the 	
Peninsula subsidiary, which will remain an unrestricted subsidiary. Pro forma 	
for the acquisition, Peninsula is expected to be slightly above 6x leveraged. 	
This includes a $144 million seller note that will be issued out of the 	
Peninsula restricted group. If the Peninsula restricted group is merged with 	
Boyd's, leverage is estimated to decline to approximately 7.6x. 	
	
The affirmation also recognizes operational benefits of the acquisition 	
including increased scale and geographic diversification. The latter is 	
especially important given Boyd's high exposure to the still challenged Las 	
Vegas Locals market, which comprises about 38% of Boyd's wholly-owned property 	
EBITDA pro forma for IP. 	
	
The Negative Outlook continues to reflect Fitch's concerns relating to:	
	
--Boyd's sizable exposure to the economically challenged Las Vegas Locals market	
(38% of LTM property EBITDA annualizing IP);	
	
--Increasing level of competition in Lake Charles and Shreveport, Louisiana; 	
	
--Senior secured leverage covenant, which steps down to 4.25x on June 30, 2012 	
and 4.0x on Dec. 31, 2012 relative to the company reported covenant senior 	
secured leverage of 4.03x as of March 31, 2012;	
	
--Free cash flow (FCF) pressure from increased interest cost if Boyd terms out 	
some its credit facility with longer-term debt ($1.8 billion of credit facility 	
coming due by 2015).	
	
Fitch's estimated FCF run rate for Boyd's restricted group is approximately $110	
million - $130 million and LTM FCF is $129 million. Fitch expects Boyd's 	
existing wholly-owned properties' EBITDA growth to remain in the low 	
single-digit range in 2012 and 2013 (consistent with the last two reported 	
quarters ending first quarter 2012) and be largely flat in 2014 as the 	
competition in Louisiana opens in 2013 and 2014 and ramps up. With that, 	
reaching the low 7x leverage range should be achievable for Boyd within a 1-2 	
year timeframe but there is minimal margin for negative deviation. 	
	
FCF Profile:	
	
Boyd's solid FCF profile is supported by the company's lack of major capital 	
plans and relatively inexpensive average cost of debt. However, Boyd's FCF could	
be pressured as it may  eventually terms out a sizable portion of its $1.8 	
billion credit facility - due in 2015 - with more expensive long-term debt. 	
	
Fitch views Boyd's recurring, discretionary FCF profile in the context of:	
	
--$365 million of LTM adjusted wholly-owned EBITDA after corporate expense 	
(assumes $20 million of Peninsula management fee and annualizes IP's EBITDA 	
based on the first two reported quarters);	
	
--$155 million in interest expense pro forma for the $150 million incremental 	
loan and $50 million draw on the revolver; 	
	
--$60 million-$80 million on maintenance capex;	
	
--Roughly $20 million of recurring Echelon costs, including the fees associated 	
with the LVE Energy Partners, LLC (LVE) settlement.	
	
Based on the more conservative figures above, Boyd has an annual FCF cushion of 	
roughly $110 million. 	
	
The following ratings are being affirmed:	
	
--IDR at 'B';	
--Senior secured credit facility at 'BB/RR1';	
--Senior unsecured notes at 'CCC/RR6';	
--Senior subordinated notes at 'CC/RR6'.
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