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
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
--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'.