TEXT-S&P assigns Greektown Superholdings 'B' rating

Thu Nov 29, 2012 2:10pm EST

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                  

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