TEXT-Fitch rates Boyd Gaming proposed notes
May 31 - Fitch Ratings assigns a 'CCC/RR6' to Boyd Gaming Corp.'s (Boyd) proposed $300 million in senior unsecured notes due 2020. This issuance follows Boyd's recent agreement to purchase Peninsula Gaming Corp. (Peninsula). The notes rank pari passu to Boyd's existing $500 million in senior unsecured notes and will be guaranteed by Boyd's substantial wholly-owned subsidiaries. The 'CCC/RR6' rating, which is two notches below Boyd's 'B' IDR, incorporates Fitch's expectation of minimal recovery in the event of a default. Fitch's recovery estimate of 0%-10% for the senior notes does not factor in the value of the Peninsula's residual equity and/or the value of the anticipated management fees. At this point, the management fee terms are not finalized and ultimate acquisition capital structure is uncertain, although Boyd does have committed financing in place. Fitch may incorporate additional value for Peninsula in Boyd's recovery analysis once these items are executed, which could support an upgrade of the senior unsecured notes' Recovery Rating to 'RR5'. The note issuance is expected to be leverage neutral and to increase availability on Boyd's revolver (and reduce secured debt) by about $86 million. Boyd received $150 million in incremental revolver commitments to help fund a $205 million contribution to a subsidiary that will acquire Peninsula Gaming LLC. The $291 million in estimated note proceeds will be used to repay amounts outstanding on Boyd's revolver of which $150 million will be a permanent reduction. The transaction is a slight credit positive since it reduces the amount of secured debt outstanding, which eases Fitch's concern relating to Boyd's compliance with its senior secured leverage maintenance covenant. Prior to the issuance of the 2020 notes, Fitch was calculating covenant secured leverage pro forma for the Peninsula acquisition at around 4.3x. The ratio should now be closer to 3.6x, which provides more headroom relative to the 4.25x covenant threshold. The covenant steps down to 4.00x in March 2013, 3.75x in September 2013 and 3.5x in March 2014. Boyd has about $215 million in senior unsecured notes maturing in April 2014. Fitch would have liked to see Boyd address this maturity with a larger unsecured note issuance. The 2014 maturity can be addressed with about $262 million available on the revolver pro forma for the transactions, but a draw to retire the 2014 bonds would largely negate the credit positive discussed above. However, there is a chance that this senior note issuance could be upsized. Fitch views the Peninsula acquisition neutrally in the near term and as a positive once Peninsula is folded into Boyd's restricted group, which is management's plan. A combination of Peninsula with Boyd's restricted group would support a Rating Outlook revision to Stable from Negative, as discussed in Fitch's May 21, 2012 press release. The Negative Outlook on Boyd's 'B' IDR 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. Although this concern is partially addressed with the expected repayment of the revolver; --Free cash flow (FCF) pressure from increased interest cost if Boyd terms out some its credit facility with longer-term debt ($1.5 billion of outstanding on credit facility pro forma for the senior note issuance coming due by 2015). Fitch views Boyd's wholly-owned restricted group leverage of around 8x in context of the company's business risk as high for 'B' IDR. However, Boyd's restricted group should be able to generate $90 million - $110 million in FCF per year ($129 million of the LTM period) and EBITDA is expected to grow in the in the low single-digit range in 2012 and 2013 (consistent with the last two reported quarters ending first quarter 2012) before going flat in 2014 as competition in Louisiana comes online. With that, reaching the low 7x leverage range (more commensurate with 'B' IDR) should be achievable for Boyd within a one to two 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 the company may continue to term out the $1.5 billion outstanding on its 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); --$175 million in interest expense pro forma for the $300 million note issuance (assumes 9% coupon); --$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 $90 million. Fitch currently rates Boyd as follows: --IDR 'B'; --Senior secured credit facility 'BB/RR1'; --Senior unsecured notes 'CCC/RR6'; --Senior subordinated notes 'CC/RR6'.