Nov 12 - Fitch Ratings downgrades Marina District Finance Company, Inc.'s
(Borgata) Issuer Default Rating (IDR) to 'B-' from 'B' and downgrades Borgata's
senior secured credit facility to 'BB-/RR1' from 'BB/RR1' and senior secured
first-lien notes to 'B+/RR2' from 'BB-/RR2'. Borgata's Rating Outlook is revised
to Stable from Negative.
Fitch also affirms Boyd Gaming Corp.'s (Boyd) and Peninsula Gaming LLC's
(Peninsula) IDRs at 'B'. Boyd's and Peninsula's issue specific ratings are also
affirmed and listed at the end of this release. The Rating Outlooks remain
Negative for Boyd and Stable for Peninsula.
The downgrade of Borgata's IDR reflects Fitch's heightened concern regarding the
competitive landscape facing the Atlantic City market. On Nov. 6th, Maryland
voters approved a ballot which reduces the state's gaming tax rate, allows table
games and authorizes an additional gaming license in Prince George's County.
Also, last week Wynn Resorts announced plans to apply for Philadelphia's second
license. Wynn's plans include a 300-room hotel and Fitch expects the casino
resort, should Wynn receive the license, to be more comparable in terms of
amenities and quality to Borgata than what is currently offered in the
Philadelphia area. (According to a Nov. 11th Philadelphia Inquirer article, five
other interested parties have submitted impact studies to the City of
Philadelphia before the last week's deadline, including Penn National Gaming.)
These developments further exacerbate an already competitive landscape with
Resorts World in Queens, NY and Revel in Atlantic City having a noticeable
impact on Borgata's recent operating results. Also, the New York legislature
passed a measure in the 2012 session to allow seven full-scale casinos in the
state. The measure needs to be passed again in the 2013 session and be approved
by the voters that same year in a referendum. It is unknown where these casinos
will be located, but if the measure is made into law, it could involve allowing
table games at Empire Casino in Yonkers, NY and/or Resorts World.
The downgrade also takes into account the uncertainty related to Hurricane
Sandy. Fitch does not expect Sandy to have a long-term impact on Borgata, and
the property will be reimbursed at least partially for the lost business through
business interruption insurance ($1 million deductible). However, the amount of
any insurance reimbursement is inherently subjective and depends on negotiations
between Borgata and insurance carriers. Also, receipt of proceeds could be
subject to meaningful delays.
The five-day closure and the lost business during the immediate recovery could
pressure liquidity and/or Borgata's compliance with its $125 million minimum
EBITDA covenant, depending on the severity of the impact. Borgata's gaming
revenues declined by 20.9% in October, which captures four out of five days the
casino was closed due to Sandy.
The revision of the Outlook to Stable from Negative reflects Borgata's solid
free cash flow (FCF) profile, which Fitch expects to trough at $25 million - $35
million once Revel fully ramps up. Borgata FCF is expected to get a boost from
reduced assessed value and property tax credits once the casino-resort finalizes
its assessed value settlement with Atlantic City. The city already significantly
reduced the assessed values of Trump Entertainment's and Caesars Entertainment's
properties and in certain instances agreed to grant tax credits based on prior
Borgata's 'B-' IDR incorporates adequate cushion against further deterioration
in operating results and FCF stemming from accelerated ramp up of Revel and/or
other competitive pressures discussed above.
Borgata's leverage and interest coverage ratios were 5.7 times (x) and 1.6x,
respectively, through the latest 12 months (LTM) period ending Sept. 30, 2012.
Fitch expects Borgata's leverage to trend towards 7x in 2013 as EBITDA
approaches trough levels around mid-2013.
The affirmation of Boyd's IDR at 'B' reflects Boyd's healthy FCF profile and the
pending acquisition of Peninsula, which will be accretive to Boyd's credit
profile. These credit considerations largely offset Fitch's heightened concern
relating to Boyd's lackluster operating performance over the past two quarters,
particularly in the company's Las Vegas Locals segment. Boyd's wholly owned
EBITDA declined by approximately 10% and 7% in the second and third quarters of
2012, respectively, when excluding IP (acquired in October 2011) and the
one-time items in the third quarter ($6 million impact from Hurricane Isaac and
prior year's tax adjustment).
The Las Vegas Locals segment accounts for 37% of Boyd's wholly owned EBITDA
(less than a quarter once Peninsula is consolidated). The segment experienced 2%
and 5% revenue declines and 11% and 21% EBITDA declines in the second and third
quarters of 2012, respectively. Fitch attributes the declines at least partially
to the competitive Las Vegas Locals environment as the state reported revenues
for the Locals market are slightly up year-to-date through September. The
company stated that it is addressing the declines by accelerating slot machine
replacements in the market, with increased emphasis on lower denomination games.
Fitch believes the risk of Boyd breaching its Dec. 31, 2012 total leverage
covenant, when it is scheduled to step down to 7.25x (relative to 7.35x reported
for period ending Sept. 30, 2012) is manageable. Boyd's management stated that
they are in conversations with the bank group lenders to amend the financial
covenants, which Fitch believes is achievable given Boyd's healthy FCF profile.
Fitch calculates run-rate FCF for Boyd's main restricted group at around $95
million in the base case. This is enough to absorb Fitch's estimated $10 million
- $20 million negative EBITDA impact from gaming expansions around the Gulf
Coast area (mainly Ameristar Lake Charles having an impact on Delta Downs in
late 2014 and early 2015) as well as roughly $30 million - $35 million in
increased interest expense once Boyd refinances its 2014 subordinated notes and
its credit facility, which matures December 2015.
Fitch's $95 million base case FCF forecast includes the following estimates:
--Restricted group property EBITDA of $365 million (same as LTM EBITDA);
--Peninsula management fees of $20 million;
--Cash-based corporate expense of $40 million;
--Echelon related expenses including Las Vegas Energy (LVE) settlement fees of
($17.7 million for LTM period);
--Interest expense of $170 million (run rate based on debt currently
--Maintenance capex of $60 million ($74 million for LTM period including $18.6
million spent at IP year-to-date in 2012).
Once the Peninsula transaction closes this quarter Boyd will also have access to
50% of Peninsula's excess cash flows. Peninsula's credit agreement restricted
payment covenants permit Peninsula to pay dividends based on a basket equal to
$20 million plus excess cash flow not used for mandatory prepayments of the term
loan (50%) as long as leverage remains 0.5x below maintenance covenant levels.
Fitch estimates that excess cash flow will be substantial at $60 million - $80
million on the conservative side. Peninsula dividends can potentially help
offset the amortization on Boyd's term loans ($42.5 million per year).
Boyd's Credit Metrics
Fitch calculates Boyd's wholly owned leverage and interest coverage for the LTM
period ending Sept. 30, 2012 at 8.8x and 1.9x, respectively. Fitch expects the
ratios to improve somewhat in 2013 as Boyd starts to collect management fees
from Peninsula, but leverage is expected to remain above 8x through Fitch's base
case forecast horizon, or above 7x if consolidated with Peninsula. In
calculating Boyd's ratios, Fitch subtracts from EBITDA Echelon related expenses
including site maintenance (captured in pre-opening expenses) and settlement
fees paid to Las Vegas Energy Partners (LVE; eliminated in Boyd's statements).
These expenses, which Fitch considers to be recurring, equaled $17.7 million for
the LTM period ending Sept. 30, 2012.
Peninsula Gaming Acquisition
The Peninsula acquisition is a positive for Boyd's credit profile and is a key
driver for affirming Boyd's IDR at 'B' despite the reported weakness in the Las
Vegas Locals segments.
In the near term, Boyd will benefit from management fees (estimated at around
$20 million per year) and possible dividends paid by Peninsula, which is
expected to generate healthy discretionary FCF. Longer term, Boyd plans to
consolidate Peninsula into its main restricted group, which should strengthen
the overall credit profile by reducing leverage (Peninsula will use at least
half of FCF to pay down its credit facility in the interim) and diversifying
Boyd's asset base away from the Las Vegas Locals market. Fitch does not expect
this to occur until mid-2014 as Peninsula's bonds are not callable until August
Peninsula's 'B' IDR reflects its solid FCF profile, healthy liquidity profile
and an attractive asset portfolio, consisting of several locals oriented
properties that are largely insulated from competitive pressures. Fitch
estimates Peninsula's total leverage (including seller's note) and interest
coverage ratios pro forma for the merger closing at around 7.2x and 2.4x,
Relationship Between the IDRs
Fitch does not firmly link the IDRs of Boyd's, Borgata's (50% owned and managed
by Boyd) or Peninsula.
In the case of Boyd and Borgata, there is little strategic benefit for Boyd of
having Borgata in its asset portfolio since the property is not part of Boyd's
loyalty program and there is no cross marketing between Boyd's properties and
Borgata, which are geographically disparate. Therefore, Fitch believes there is
little incentive for Boyd, which is now a stronger credit (albeit just
marginally), to support Borgata if Borgata's credit profile deteriorated further
due to intensified competitive pressures.
The rating relationship is more ingrained between Boyd and Peninsula. The
ownership of Peninsula, with lower leverage and healthy FCF, boosts Boyd's
credit profile and once consolidated into Boyd's restricted group could be a
catalyst for affirming Boyd's IDR at 'B' with a Stable Outlook. Without the
Peninsula acquisition, Boyd's IDR would likely have been downgraded to 'B-' at
From Peninsula lenders' perspective, Fitch views Peninsula's credit profile
largely on a stand-alone basis since there is adequate covenant protection
against Boyd's ability to extract value out of the Peninsula's restricted group
and there are no cross-defaults between the restricted groups. If Boyd decides
to consolidate Peninsula into its restricted group, Peninsula's debt will likely
be refinanced with debt issued by Boyd, in which event Fitch will withdraw
ratings on Peninsula's debt.
What Could Trigger a Rating Action
A downgrade of Borgata's IDR to 'CCC' (next notch down from 'B-') is unlikely
unless there is notable risk of FCF turning negative or there is heightened risk
that Borgata will not be able to refinance its 2015 notes due to difficult
capital markets conditions and/or incremental competitive events that are
negative to Borgata's credit profile.2012 Outlook: Gaming -- Market Exposure the Differentiating FactorCorporate Rating MethodologyParent and Subsidiary Rating LinkageRecovery Ratings and Notching Criteria for Non-Financial Corporate Issuers