TEXT-S&P raises Cannery Casino Resorts rating to 'B'

Wed Oct 3, 2012 3:02pm EDT

Overview
     -- U.S. gaming operator Cannery Casino Resorts (Cannery) closed on $590 
million in new senior secured credit facilities to refinance its existing debt.
     -- We are assigning our 'BB-' issue-level rating and '1' recovery ratings 
to the first-lien senior secured credit facilities and our 'CCC+' issue-level 
rating and '6' recovery rating to the second-lien senior secured credit 
facilities.
     -- We are also raising our corporate credit rating on the company to 'B' 
from 'B-' and removing the rating from CreditWatch, where it was placed with 
positive implications on Sept. 13, 2012.
     -- The stable rating outlook reflects our expectation that the company 
will continue to generate levels of cash flow sufficient to support the 
capital structure and maintain credit measures appropriate for the rating.
 
Rating Action
On Oct. 3, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on Las Vegas-based Cannery Casino Resorts LLC (Cannery) to 'B' 
from 'B-' and removed the rating from CreditWatch, where it had been listed 
with positive implications on Sept. 13, 2012. The rating outlook is stable.

At the same time, we assigned Cannery's new $425 million first-lien credit 
facilities an issue-level rating of 'BB-' with a recovery rating of '1', 
indicating our expectation for very high (90% to 100%) recovery for lenders in 
the event of a payment default. The facility consists of a $40 million senior 
secured revolving credit facility due 2017 and a $385 million senior secured 
term loan due 2018. 

In addition, we assigned Cannery's $165 million second-lien senior secured 
term loan due 2019 an issue-level rating of 'CCC+' with a recovery rating of 
'6', indicating our expectation for negligible (0% to 10%) recovery for 
lenders in the event of a payment default. 

Cannery used proceeds from the new credit facilities to refinance its existing 
credit facilities and repay $87.8 million of its preferred stock. In 
conjunction with the transaction, $38 million of the preferred stock was 
converted to common equity, and there is no more preferred stock in the 
capital structure. The $590 million in credit facilities represent an increase 
of $25 million from the originally proposed credit facilities. However, our 
measure of total debt in the capital structure remains unchanged, as we viewed 
the preferred stock as debt.

Rationale
The upgrade reflects the elimination of near-term covenant and refinancing 
concerns, as well as the elimination of Cannery's preferred stock (which we 
viewed as debt). Although Cannery will have lower cash interest coverage as a 
result of the transaction (moving to the high-1x area from the mid-2x), over 
the longer term, we believe this transaction provides a more manageable 
capital structure as it eliminates the preferred stock (which accrued at a 20% 
rate).

Although Cannery has improved its financial profile, we still view the 
financial risk profile as "highly leveraged," according to our criteria, given 
the company's high debt balances and our projection that debt to EBITDA will 
remain above 6.5x through 2013. 

Our assessment of Cannery's business risk profile as "weak" reflects the 
competitive dynamics of the Las Vegas locals market, and our expectation that 
the U.S. economy and the Las Vegas locals gaming market will only gradually 
improve over the next few years. Similarly, it also incorporates the potential 
new competition facing Cannery's Meadows Casino in Pennsylvania. However, 
Cannery's cash flow diversification from operating in two markets on opposite 
sides of the country somewhat tempers these factors.

We expect Cannery's consolidated EBITDA will be relatively flat in 2012, 
driven by modest growth at the Meadows Casino and flat growth at Cannery's Las 
Vegas locals properties. We expect EBITDA at the Meadows (which represented 
almost two-thirds of Cannery's EBITDA during the 12 months ended June 2012) 
will increase in the mid single digits, driven by modest growth in gaming 
revenues and a reduction in the table game tax rate to 14% from 16% (effective 
September 2012), which should drive some modest margin improvement. We do not 
expect the recent opening of Horseshoe Casino Cleveland (about 150 miles away) 
to have more than a marginal impact on Meadows' operating performance, as we 
believe the Meadows attracts the majority of its customers within a 50-mile 
radius. Similarly, over the intermediate term, we do not believe potential 
casinos in Youngstown, Ohio (about 100 miles away) and at Nemacolin Woodlands 
(about 60 miles away and expected to open in the third quarter of 2013) will 
have a meaningful impact on the Meadows revenue, given their expected scope 
and distance from the Meadows.

We believe that some gradually improving economic indicators in Las Vegas, 
such as convention attendance, visitor volume, and room rates on the Las Vegas 
Strip, will spur modest improvement in the Las Vegas locals market over the 
next few years. However, we expect improvement in the locals market to 
somewhat lag improvement on the Las Vegas Strip. Therefore, we do not 
anticipate a return to meaningful growth or to previously generated levels of 
revenue and EBITDA in the locals market over at least the next few years. In 
2012, we expect declines across Cannery's Las Vegas locals properties, largely 
the result of the loss of EBITDA from the Rampart Casino following the end of 
its lease earlier this year. We believe, however, that improvement in 
performance at the company's other properties in 2012, and incremental EBITDA 
from Cannery's consulting contract with a Native American tribe, will largely 
offset the loss of cash flow from Rampart and result in modest growth in 
consolidated EBITDA. For 2013, our preliminary expectation for Cannery's 
consolidated operations is for flat to low-single-digit growth in revenue and 
EBITDA.

Liquidity
Based on expected sources and uses of liquidity over the next 12 to 18 months 
and incorporating our performance assumptions, Cannery has an "adequate" 
liquidity profile, according to our criteria. Our assessment of Cannery's 
liquidity profile incorporates the following expectations and assumptions:
     -- We expect sources of liquidity over the next 12 to 18 months to exceed 
uses by at least 1.2x.
     -- We believe sources of liquidity would remain positive, even if 
projected EBITDA declines by 15%.

Cannery's sources of liquidity include internally generated cash flow and 
availability under its $40 million revolving credit facility. These sources 
should be adequate to fund moderate capital expenditures and modest 
amortization payments.

Based on our performance expectations, we believe Cannery will maintain 
adequate cushion under its total leverage and interest coverage covenants, 
which start being measured at the end of March 2013 at 8.25x and 1.5x, 
respectively. Debt maturities are limited to modest scheduled annual 
amortization under the term loan until 2017, at which point the revolving 
credit facility matures.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Cannery, to be published on RatingsDirect following this report. 

Outlook
The stable rating outlook reflects our expectation that the company will 
continue to generate levels of cash flow sufficient to support the capital 
structure and maintain credit measures appropriate for the rating. A downgrade 
could occur if operating performance is meaningfully weaker than our current 
expectations to the extent that EBITDA coverage of interest weakens to below 
1.5x, which would likely be the result of destabilization in the Las Vegas 
locals gaming market as a result of further economic disruption or the Meadows 
property losing more revenue to additional competition that we currently have 
forecasted. Our consideration of a higher rating is unlikely until leverage 
decreases to below 6x, which we do not anticipate in the near term.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 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
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

Upgraded
                                                 To                 From
Cannery Casino Resorts LLC
 Corporate Credit Rating                         B/Stable/--  B-/Watch Pos/--

New Rating

Cannery Casino Resorts LLC
Washington Trotting Assn, Inc.
 Senior Secured
  $425M first-lien credit facilities             BB-                
   Recovery Rating                               1
  $165M second-lien sr secd term loan due 2019   CCC+               
   Recovery Rating                               6
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