TEXT-S&P assigns Greektown Superholdings 'B' rating
Overview -- U.S. gaming operator Greektown Superholdings Inc. plans to issue $455 million in new senior secured debt to refinance its existing debt. -- We are assigning Greektown our 'B' corporate credit rating. At the same time, we are assigning the proposed $355 million first-lien credit facility our 'BB-' issue-level rating with a recovery rating of '1', and the proposed $100 million second-lien term loan our 'CCC+' issue-level rating with a recovery rating of '6'. -- The stable outlook reflects our belief that operating performance will remain fairly stable over the intermediate term and that, notwithstanding our expectation for modest EBITDA growth and debt reduction, credit measures will remain in line with the rating. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services assigned Detroit, Mich.-based gaming operator Greektown Superholdings Inc. its 'B' corporate credit rating. The outlook is stable. At the same time, we assigned the company's proposed $355 million first-lien credit facility (consisting of a $15 million revolver due 2015, a $15 million term loan A due 2017, and a $325 million term loan B due 2018) our 'BB-' issue-level rating, 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. We also assigned the company's proposed $100 million second-lien term loan due 2019 our 'CCC+' issue-level rating, with a recovery rating of '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. Proceeds from the proposed credit facilities are expected to be used to refinance $400 million in outstanding debt (including $15 million in expected revolver borrowings at the time of close of the transaction), and to pay for accrued interest, fees, and expenses. Rationale The 'B' corporate credit rating reflects our assessment of Greektown's financial risk profile as "highly leveraged" and our assessment of the company's business risk profile as "weak," according to our criteria. Our assessment of Greektown's financial risk profile as highly leveraged reflects our expectation that leverage (adjusted to include preferred stock, which adds around 3 turns to unadjusted leverage) following the proposed financing transaction will remain high, at above 8x through 2013. We believe, however, that over the intermediate term, leverage will improve to below 8x, given our expectation for continued modest EBITDA growth in conjunction with excess cash flow sweep provisions and required amortization under the proposed first-lien term loans. Further, we expect EBITDA coverage of cash interest expense will remain good for the rating, at over 2x, as the preferred stock does not require cash interest payments, nor does it accrued interest, unless the board declares the dividend, according to management. At Sept. 30, 2012, leverage and coverage pro forma for the proposed financing transaction were 8.3x and 2.7x, respectively. Our assessment of Greektown's business risk profile as weak reflects the company's reliance on a single casino in a highly competitive market. This is somewhat tempered by our favorable view of the Detroit gaming market, given its resiliency over the past several years and its low gaming tax rate relative to other neighboring jurisdictions. Our rating incorporates our expectation for net revenue and EBITDA to be essentially flat in 2012. This follows 2.2% growth in revenue and 4.4% growth in EBITDA in the first nine months of 2012, and reflects our expectation that fourth-quarter revenue and EBITDA will decline modestly due to the May 2012 opening of a new casino in Toledo, Ohio, about 60 miles away. We do not believe, however, that the Toledo casino will have a meaningful long-term negative impact on Greektown since a relatively small portion of Greektown's customers are from Ohio, and Greektown offers more amenities. For 2013, our ratings incorporate our expectation for low-single-digit percent growth in revenue and EBITDA. Our revenue forecast stems from our economists' forecast for continued modest economic improvement, including 2.4% growth in consumer spending, and continued reduction in national unemployment. We believe this will help drive continued visitation and spend at Greektown, which will help offset the pressure it will face in the first half of 2013, given the additional competition in Toledo opened in mid-2012. We also believe some revenue growth could be spurred by the introduction of new and updated amenities at the property, including a new valet garage, additional dining options, and incremental slots, which should help drive increased visitation. Our rating also incorporates the assumption that EBITDA margin will remain in the low-20% area through 2013, as we believe additional costs associated with the new amenities will be offset by our revenue growth expectation. There are several groups seeking to add gaming locations in Detroit and the state of Michigan. We currently believe, however, that there is a low probability for additional competition in Michigan over the intermediate term, given several legal obstacles facing the various groups, including the need to get proposals placed on ballots for election, as well as gaining federal approvals for Tribal gaming. Nevertheless, we will continue to monitor the potential for further gaming in Greektown's market. Greektown Casino-Hotel currently offers 100,000 square feet of gaming space; 2,700 Class III slot machines (which the company expects to increase to 2,900 in the near term); 50 table games, including blackjack, craps, roulette, and baccarat; and 12 poker tables. Greektown also offers several food and beverage amenities, as well as 4,560 parking spaces and 10,000 square feet of convention space. The company is expected to open its new valet garage, with an additional 850 spaces, in the first quarter of 2013. About 98% of Greektown's patrons come from within a 100 mile radius of Detroit. Liquidity Based on the company's likely sources and uses of cash over the next 12 to 18 months and incorporating our performance expectations, Greektown has an "adequate" liquidity profile, according to our criteria. Our assessment of Greektown's liquidity profile incorporates the following expectations and assumptions: -- We expect the company's sources of liquidity to exceed uses by more than 1.2x. -- We expect sources would exceed uses even if our forecasted EBITDA declines by 15%. At Sept. 30, 2012, Greektown had $44.5 million of cash on hand and $44 million of availability under its $45 million revolving credit facility (which will be reduced to $15 million under the proposed financing transaction), after accounting for letters of credit. Operating cash flow of $16.2 million in the nine-month period, along with cash on hand, was used to fund $22.3 million of capital expenditures, which included expenditures related to the valet garage. For 2012, Greektown plans to spend around $44 million in capital expenditures, about $26 million of which is related to the valet garage. The proposed financing transaction is expected to reduce interest expense by about $20 million. This, in conjunction with our expectation for modest EBITDA growth in 2013, should drive meaningful growth in 2013 operating cash flow, which should be sufficient to fund our expectation for a reduced level of capital expenditures compared with 2012, but at a higher level than historic (around 5% of revenue), given additional remaining costs for the valet garage and amenity improvements in 2013. We believe operating cash flow generation over the intermediate term will be sufficient to support capital expenditures, expected term loan amortization payments of $6.3 million, and provide for further debt reduction through excess cash flow sweep provision in the first-lien term loan beginning in 2014. The proposed term loans have two financial maintenance covenants. Based on our performance assumptions, we expect Greektown to maintain good cushion with respect to both covenants over the intermediate term. Recovery analysis We rate Greektown's proposed first-lien credit facility 'BB-', with a recovery rating of '1'. Our issue-level rating on Greektown's proposed second-lien facility is 'CCC+', with a recovery rating of '6'. Outlook The stable outlook reflects our belief that operating performance will remain fairly stable over the intermediate term and that, notwithstanding our expectation for modest EBITDA growth and debt reduction, credit measures will remain in line with the rating. Lower ratings would be considered if EBITDA meaningfully underperforms our expectation, driving interest coverage below the mid-1x area, which would also likely increase the potential for a covenant violation. Higher ratings are unlikely at this time given our expectation for only modest growth in EBITDA, which would result in leverage, including the preferred stock, remaining well above 6x, our threshold for a 'B+' rating. Related Criteria And Research -- 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 -- 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 New Rating Greektown Superholdings Inc. Corporate Credit Rating B/Stable/-- Senior Secured $15M 1st-lien term A loan due 2017 BB- Recovery Rating 1 $325M 1st-lien term B loan due 2018 BB- Recovery Rating 1 $15M 1st-lien revolver due 2015 BB- Recovery Rating 1 $100M 2nd-lien term loan due 2019 CCC+ Recovery Rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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