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