TEXT-Fitch affirms Boyd Gaming Corp
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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