TEXT - Fitch affirms Pinnacle Entertainment 'B' rating
Dec 21 - Fitch Ratings has affirmed Pinnacle Entertainment, Inc's (Pinnacle) Issuer Default Rating (IDR) at 'B' following Pinnacle's announcement that it entered into an agreement to acquire Ameristar Casinos, Inc. (Ameristar) for $2.8 billion, including $1.9 billion of debt. Pinnacle's Rating Outlook remains Positive. See the full list of rating actions at the end of this release. The affirmation and Positive Outlook reflect the strong strategic rationale for the acquisition, increased geographic diversification of the combined group, and more robust discretionary free cash flow (FCF) profile. These transaction positives result in notably reduced business risk, which is balanced by a modest increase in financial risk, namely a moderate increase in leverage and a more top-heavy capital structure. Overall, Fitch views this transaction favorably as it roughly doubles the size of the company with limited geographic overlap in properties. Ameristar's regional casinos maintain some of the highest operating margins in the industry. Fitch calculates Pinnacle's leverage as of the latest 12 months (LTM) ended Sept.30, 2012 at 5.1x, with adjusted EBITDA of $284 million and debt of $1.44 billion. Ameristar's LTM leverage is similar at 5.3x with adjusted EBITDA of $365 million and debt of $1.92 billion. Pinnacle obtained commitments for $1.1 billion of additional debt to purchase Ameristar's equity and pay transaction fees, which will result in pro forma total debt of nearly $4.48 billion. Pro forma LTM leverage is nearly 6.9x, based on combined adjusted EBITDA of $649 million. However, Fitch estimates run-rate adjusted EBITDA is closer to $700 million (leverage of around 6.4x) considering the ramp up of L'Auberge Baton Rouge (opened September 2012) and some immediate cost synergies. Pinnacle's estimate of $40 million in cost synergies is reasonable, given that it is below Ameristar's corporate expense run rate of $50 million. Leverage could peak in the mid-to-high-6x range during the development of Ameristar Lake Charles, which is scheduled to open in the third quarter of 2014. Fitch forecasts that pro forma leverage should return to the mid-to-low-5x range by the end of 2014 and 5x or below by 2015. This leverage trajectory is consistent with a 'B+' IDR given the improved business risk profile, supporting the Positive Outlook. The ratings also take into account a longer-term leverage target in the 4x-5x range, which is consistent with a higher IDR, given the pro forma business risk profile. The pro forma capital structure includes primarily additional debt at both the Pinnacle and Ameristar restricted groups. The company is looking into combining the restricted groups, so the ultimate capital structure may differ, but if it closes as currently structured, there will be an additional $410 million of senior secured debt at Pinnacle. Fitch places Pinnacle's 'BB-/RR2' senior unsecured rating and 'B-/RR5' subordinated debt rating on Rating Watch Negative as a result of increased secured debt at Pinnacle in the potential pro forma capital structure, which weakens the recovery prospects of those instruments. Ameristar's bonds contain change of control put provisions, but they are trading at strong premiums so they are unlikely to be exercised. The Negative Watch is assigned solely in connection with the current transaction terms. Should the transaction close with its current structure, the senior unsecured and subordinated issue ratings would be downgraded at or prior to the closing of the transaction (expected mid-2013). Potential exists for changes to the proposed capital structure, and Fitch will consider any changes to debt instrument ratings in the context of its recovery analysis. The Positive Outlook on the IDR of 'B' indicates a longer-term time horizon (12-24 months). The transaction could close before Fitch views that the overall credit profile has improved enough to warrant an upgrade to 'B+'. WHAT COULD TRIGGER A RATING ACTION Positive: Future developments that may, individually or collectively, lead to positive rating action include: --Pro forma leverage trajectory continuing to progress toward mid-to-low-5x range by the end of 2014 and 5x or below by 2015; --Closing the acquisition of Ameristar at favorable terms with synergies exceeding $40 million; --Better than expected ramp up of operating performance at Baton Rouge; Fitch's base case incorporates roughly $35 million of property EBITDA in 2013; --General operating outperformance relative to Fitch's pro forma base case of roughly $700 million in EBITDA over the next couple years. Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Pinnacle undertaking a significant development outside of River City phase II. Ameristar Lake Charles, or outfitting River Downs for video lottery terminals (VLTs); --General operating underperformance relative to Fitch's pro forma base case of roughly $700 million in EBITDA over the next couple years; --Texas legalizing gaming in its 2013 legislative session, which would place pressure on the Lake Charles and Bossier City markets; --Deterioration in the macro-economic environment; Fitch's base case currently incorporates the continuation of a slow-growth recovery in the U.S. Fitch takes the following rating actions: Pinnacle Entertainment, Inc. --IDR affirmed at 'B'; --Senior Secured Credit Facility affirmed at 'BB/RR1'. In addition, Fitch places the following issue ratings on Rating Watch Negative: Pinnacle Entertainment, Inc. --Senior Unsecured Notes due 2017, 'BB-/RR2'; --Senior Subordinated Notes due 2020 and 2022, 'B-/RR5'.
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