Fitch Revises Boyd's Outlook to Stable & Rates Credit Facility 'BB/RR1'; Affirms Related Entities

Tue Aug 6, 2013 5:19pm EDT

(The following statement was released by the rating agency) NEW YORK, August 06 (Fitch) Fitch Ratings assigns an 'BB/RR1' rating to Boyd Gaming Corp's (Boyd) proposed $1.75 billion senior secured credit facility. Fitch has also affirmed the following ratings: Boyd --IDR at 'B' (Outlook revised to Stable from Negative); --Existing senior secured credit facility at 'BB/RR1'; --Senior unsecured notes at 'CCC+/RR6'; --Senior subordinated notes at 'CCC/RR6'. Peninsula Gaming LLC (Peninsula) & Peninsula Gaming Corp. as co-issuer --IDR at 'B' (Stable Outlook); --Senior secured credit facility at 'BB/RR1'; --Senior unsecured notes at 'CCC+/RR6'. Marina District Finance Company, Inc. (Borgata) --IDR at 'B-' (Stable Outlook); --Senior secured revolving credit facility at 'BB-/RR1'; --Senior secured first-lien notes at 'B+/RR2'. The new Boyd credit facility will consist of a $600 million revolver due 2018, a $150 million term loan A due 2018 and a $1 billion term loan B due 2020. The term loan A will amortize at 5% per year and the term loan B at 1% per year. The proceeds will be used to refinance Boyd's existing credit facility. The term loans will also have a 50% excess cash flow sweep provision. Boyd's Peninsula assets and 50% stake in the Borgata will not be part of the collateral package. RATING DRIVERS The Outlook revision to Stable reflects: --Operating stabilization in Boyd's Las Vegas Locals segment; --More certainty that Peninsula will be merged into Boyd's credit group; --Improved maturity profile as a result of the redemption of the subordinated notes due 2014, the anticipated refinancing of Boyd's credit facility due 2015 and the anticipated redemption of the subordinated notes due 2016; --Improved leverage and FCF profile as a result of Boyd's sale of non-core assets (Echelon and Dania sites) and the anticipated equity issuance with all proceeds being directed at debt paydown. The above capital structure initiatives bring Boyd's wholly-owned (including Peninsula) leverage down to more manageable level of approximately 7.4x on a pro forma basis compared to 8.3x for the LTM period ending March 31, 2013. Also maturities are addressed through 2018, and Boyd's FCF run rate (excluding Peninsula FCF but including Peninsula management fees) remains solid at approximately $100 million as the credit facility refinancing is largely expected to be interest cost neutral. The Outlook revision to Stable from Negative takes into account Boyd's improved financial flexibility. However, the company's leverage remains high relative to its regional casino operator peers. Fitch does not expect Boyd's assets in aggregate to experience meaningful EBITDA growth. Therefore, deleveraging will rely on debt paydown from FCF, which is adequate for sustaining healthy operations but is modest relative to Boyd's debt load (less than 5% relative to debt). These factors largely limit near-term positive rating momentum. Las Vegas Locals Market Boyd's Las Vegas Locals segment has reversed a negative trend in the first quarter 2013 with the segment's EBITDA growing 2% and 12% in the first quarter 2013 and second quarter 2013, respectively. This is after a 12% EBITDA decline in the full-year 2012. The Locals segment EBITDA improvement in the first half 2013 is largely driven by efficiency initiatives as revenues were mostly flat. Fitch expects Boyd's Locals revenues to remain flat for the remainder of the year with the EBITDA margin improvement carrying into the second-half of 2013. Longer-term, Fitch expects positive revenue growth to be supported by the market's positive economic trends and stabilization in the promotional environment. Las Vegas' economic trends are positive with the unemployment rate declining to 10.1% in June 2013 from the peak level of 14.6% reached in mid-2010 and 11.8% in June 2012 period. The Case & Schiller housing price index for the market has also improved to 114.09 in May 2013, which is up from the prior year period's 92.55. The housing index also improved on a sequential basis from 111.06 in April 2013. The improved economic landscape has not directly translated into robust gaming revenue growth. In 2012 Locals gaming revenues grew 1.4% and the revenues are down 20% year-to-date through June. Boyd's FCF Fitch calculates run-rate FCF for Boyd's main restricted group at around $100 million in the base case. This is enough to absorb considerable operating and competitive pressure. Fitch's base case FCF forecast includes the following estimates: --Restricted group property EBITDA of $348 million (same as LTM EBITDA); --Peninsula management fees of $20 million; --Cash-based corporate expense of $45 million; --Interest expense of $140 million; --Maintenance capex of $85 million (about $87 million for LTM period). Until Boyd consolidates Peninsula's credit group into its own, Boyd has access to roughly $80 million - $90 million of Peninsula's FCF per year. Peninsula's senior notes limit restricted payments to $15 million plus 50% of cumulative net income. Peninsula's credit facility permits dividends based on a basket equal to $20 million plus excess cash flows not used for the mandatory prepayments of the term loan (there is a 50% excess cash flow sweep) as long as leverage remains 0.5x below maintenance covenant levels. Fitch estimates Peninsula's discretionary FCF at slightly above $80 million for the LTM period ending June 30, 2013. Peninsula Acquisition Benefits and Peninsula Rating Drivers Boyd's November 2012 acquisition of Peninsula was a credit positive as it diversified Boyd away from the Las Vegas Locals market while being largely leverage neutral (the acquisition multiple was below Boyd's leverage). After the acquisition, Peninsula remained an unrestricted subsidiary of Boyd; however, Boyd plans to combine Peninsula with its restricted group. Fitch believes there is now more certainty with respect to the Peninsula credit group being merged into Boyd as most of Boyd's near-term potential default catalysts have been removed. Particularly, maturities have been addressed through 2018, and the FCF profile will be fortified with the refinancing of Boyd's credit facility. Fitch now places greater emphasis on credit metrics that include Peninsula than those that do not. The affirmation of Peninsula's 'B' IDR takes into account Peninsula's FCF profile and manageable debt levels. These positive factors offset Peninsula's market concentration with roughly 50% of EBITDA being generated in the Wichita, KS market and Fitch's generally lackluster outlook for regional markets. Borgata Rating Drivers The affirmation of Borgata's IDR at 'B-' reflects Borgata's leading position in the Atlantic City market, healthy FCF cushion, the prospect of online gaming and the benign nature of the gaming expansion bill passed in the state of New York. Borgata has maintained its greater than 20% market share in Atlantic City in spite of Revel entering the market in early 2012 and has performed better relative to its peers with the LTM gross revenues being down 4% relative to the market's 11% decline (includes the effect from Sandy). Some of this outperformance can be attributed to a sharp decline in promotional activity in the market by Caesars Entertainment Corp, which has four properties in the market. The Atlantic City market still faces considerable competitive headwinds, but there were no new major openings in the surrounding jurisdictions since late 2011 when Resorts World opened in Queens, NY. (A smaller casino opened in early 2012 at Valley Forge convention center near Philadelphia). No new openings of full scale casinos are anticipated until late 2016/early 2017 at the earliest when there could be one additional casino opening in Philadelphia and two casinos opening in the Catskills. The New York expansion bill also permits two video lottery terminal (VLT) facilities in Long Island that can potentially open before that. The potential for a gaming expansion in New York was a major overhang for the Atlantic City market since there was potential for full scale casinos in New York's five boroughs. The bill that passed recently and is headed for a referendum this November only permits full scale casinos in upstate New York, including two in the Catskills. Fitch expects the effect on Borgata from these casinos plus the Long Island VLTs to be manageable. Fitch calculates Borgata's run rate FCF at approximately $15 million - $25 million. Fitch believes this is a near trough range, although further downside remains from regional competitive and economic pressures as well as the anticipated second casino in Philadelphia. Fitch's estimated FCF run-rate range assumes a run rate EBITDA of $110 million (roughly first half 2013 annualized and also the credit facility covenant threshold), $70 million - $75 million in interest expense (pro forma for $40 million redemption of the 2015 notes), and $15 million - $20 million of maintenance capital expenditures. Fitch believes that the launch of online gaming, which can occur later this year, will be accretive to the FCF profile although likely not immediately given the heavy amount upfront investment needed. Relationship Between IDRs Fitch does not firmly link the IDRs of Boyd, Borgata or Peninsula. In the case of Boyd and Borgata, Fitch believes that there is a moderate rating linkage due to Borgata being eligible for an online license in the state of New Jersey. A strong linkage is precluded at this point given that Boyd only owns a 50% stake in Borgata and the profitability of online gaming is largely untested under New Jersey's legal framework. New Jersey legalized all forms of online gaming in February and is the most populous state to do so thus far in the U.S. Before online gaming was passed in New Jersey, Fitch categorized the rating linkage between Boyd and Borgata as weak. Absent online gaming, Borgata has little strategic value for Boyd as Borgata is not included in Boyd's loyalty program and operates in a difficult operating environment. To the extent Boyd remains a stronger credit and online gaming remains promising, Borgata credit will benefit from the 50% ownership by Boyd. The other JV owner is MGM Resorts International (IDR 'B' with a Positive Outlook). In 2010, MGM agreed to divest of its share in Borgata due to the state regulators' concerns over MGM's affiliations in Macau. In February 2013, MGM requested that the New Jersey regulators revisit its ability to retain its 50% stake in Borgata. Boyd's rating relationship is stronger with Peninsula. Fitch expects Boyd to merge Peninsula into its main restricted group over the next one to three years. In the meantime, Boyd benefits from Peninsula's healthy FCF, subject to limitations in the Peninsula senior notes' indenture, and about $20 million in annual management fees. Fitch views Peninsula's IDR largely on a stand-alone basis. Boyd's main restricted group is now somewhat stronger than Peninsula's post the transactions mentioned above. The Peninsula credit derives some benefit from Boyd's ownership as there is some strategic value for Boyd to own Peninsula. These benefits include diversification and access to additional jurisdictions that may consider legalizing online gaming. However, the strategic benefit is limited in that Peninsula's assets are not core to Boyd's operations as they are not included in Boyd's loyalty program. Transaction Ratings and Recovery There are no material changes in the recovery analysis as a result of Boyd's credit facility refinancing. As before, Fitch calculates recovery for Boyd's new senior secured credit facility in the 91%-100% range with no recovery for the unsecured debt. Boyd rates the senior notes 'CCC+/RR6', one notch above the subordinated notes ('CCC/RR6). Borgata's redemption of $40 million in the 2015 notes is a positive for Borgata's secured noteholders although the recovery remains in the 71%-90% range for the notes. The range corresponds with a 'RR2' Recovery Rating and a two notch uplift from Borgata's 'B-' IDR. Fitch estimates full recovery for Borgata's $60 million revolver, which has priority over the secured notes. For Peninsula, Fitch estimates full recovery for its credit facility and a recovery in the 0%-10% range for the senior unsecured notes. Peninsula's revolver has priority over the term loan; however, Fitch does not make a distinction in the ratings with both tranches being rated 'BB/RR1'. Rating Sensitivities There is now more cushion at Boyd's 'B' IDR. However a downgrade to 'B-' or a Negative Outlook revision is possible if leverage (including Peninsula) moves back towards 8x due to operating pressure and/or financial policy decisions. With leverage at about 7.4x on wholly-owned basis, near-term rating momentum for Boyd is limited. However, Boyd's operating profile can support an IDR at the higher end of the 'B' category/low end of the 'BB' category. Fitch may consider an Outlook revision to Positive or an upgrade to 'B+' if leverage declines towards 6x range. Other factors that would be viewed positively by Fitch when considering positive rating action include FCF improving further due to growth in EBITDA or decline in interest costs and/or a resumption in same-store top line growth in Boyd's Las Vegas Locals and Midwest/South segments. Further deleveraging will likely be difficult given Fitch's lackluster outlook for regional gaming markets. Together with Peninsula, Fitch expects Boyd to generate roughly $180 million in FCF a year. This will allow some pay down of debt although meaningful debt reduction will take time given the large debt load relative to the FCF (FCF is about 5% of the debt outstanding). Borgata also has some cushion at the 'B-' IDR. However, a downgrade or an Outlook revision to Negative is possible if Fitch revises its estimated FCF run-rate for Borgata towards $10 million or less or Borgata fails to refinance its 2015 notes in a timely manner. Since Borgata extended its credit facility in July 2013, its 2015 notes become its most near-term maturity. The notes become callable this October at 104.75 and currently trade close to the call price. With online gaming being legalized, Fitch believes that there is a higher likelihood that Boyd and/or MGM will support Borgata. Fitch may consider notching up Borgata's IDR accordingly if online gaming proves to be successful. On a stand-alone basis, Fitch may revise Borgata's Outlook to Positive if its top line stabilizes with FCF being at least in the $30 million range and the competitive risk related to the winning Philadelphia license appears to be manageable. There is limited upside for Peninsula's IDR given the company's high leverage relative to its operating profile. The probability of a downgrade is similarly low given Peninsula's strong FCF profile, which Fitch thinks can absorb considerable operating stress. Fitch expects that Peninsula's debt will be refinanced over the next one to three years consolidating into Boyd's main restricted group. Contact: Primary Analyst Alex Bumazhny, CFA Director +1-212-908-9179 alex.bumazhny@fitchratings.com Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Adam Dolkart Associate Director +1-312-368-2095 adam.dolkart@fitchratings.com Committee Chairperson Mark Oline Managing Director +1-312-368-2073 mark.oline@fitchratings.com Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Fitch Downgrades Borgata IDR to 'B-' & Sr Notes to 'B+/RR2'; Affirms Boyd & Peninsula IDRs at 'B' (Nov. 12, 2012); --'U.S. Gaming Recovery Models -- First-Quarter 2013' (June 3, 2013); --'2013 Outlook: U.S. Gaming - Return Generation in Full Swing' (Dec. 17, 2012); --'Corporate Rating Methodology' (Aug. 5, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013); --'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 13, 2012). Applicable Criteria and Related Research: U.S. Gaming Recovery Models — First-Quarter 2013 here 2013 Outlook: U.S. Gaming (Return Generation in Full Swing) here Parent and Subsidiary Rating Linkage here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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