October 17, 2012 / 7:00 PM / 5 years ago

TEXT-S&P rates Penn National proposed incremental term loans

Oct 17 - Standard & Poor's Ratings Services today assigned issue-level and
recovery ratings to Wyomissing, Pa.-based Penn National Gaming Inc.'s   
 proposed $1 billion of incremental term loans. We assigned the term
loans our issue-level rating of 'BBB-' (two notches higher than the 'BB'
corporate credit rating on the company) 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. The term loans will be comprised of a $400
million term loan A maturing in July 2016 and a $600 million term loan B
maturing in July 2018. Penn National plans to use proceeds from the incremental
borrowings to fund the acquisition of Harrah's St. Louis and to repay revolver
borrowings.

At the same time, we placed our issue-level rating on Penn National's 8.75% 
senior subordinated notes on CreditWatch with negative implications. The 
addition of the planned $1 billion of incremental term loans would result in a 
higher level of secured debt outstanding under our simulated default scenario 
versus our previous analysis. This would reduce the recovery prospects for the 
subordinated notes enough to warrant a downward revision to our recovery 
rating on the notes. Upon closing of the incremental term loans, we expect to 
revise our recovery rating on the notes to '5' (10% to 30% recovery 
expectation) from '4' (30% to 50% recovery expectation) and lower our 
issue-level rating to 'BB-' (one notch lower than the corporate credit rating) 
from 'BB' (the same as the corporate credit rating), in accordance with our 
notching criteria.

The corporate credit rating on Penn National is 'BB' and the rating outlook is 
stable. The rating re reflects our assessment of the company's financial risk 
profile as "aggressive" and its business risk profile as "satisfactory," 
according to our rating criteria.

Our assessment of Penn's financial risk profile as aggressive reflects the 
company's expansion-based growth strategy and high debt leverage, as well as 
construction and ramp-up-related risks associated with its development 
projects. Our expectation that Penn will be able to fund most of its 
development spending from internally generated cash flow and that the company 
will generate relatively stable cash flow over the intermediate term given its 
broad portfolio of regional gaming properties somewhat offset the negative 
risk factors. 

Our assessment of Penn's business risk profile as satisfactory reflects the 
company's geographically diverse portfolio of assets, experienced management 
team, solid operating track record, and EBITDA margins that compare favorably 
with other U.S. commercial gaming operators. Somewhat offsetting these 
positive business risk factors is a portfolio with several properties that are 
not leaders in competitive markets, and increasing competitive pressures in 
some of Penn National's key markets.

Our forecast for 2012 and 2013 incorporates our expectation of the negative 
impact that new competition in key markets will have on Penn's existing 
portfolio, as well as our expectations for performance at Penn's newly opened 
Ohio casinos. We have factored in an expectation for low- to mid-single-digit 
percentage growth in revenue and EBITDA in 2012. In 2013, we expect EBITDA to 
grow in the high-single-digit area, reflecting our belief that the two casinos 
in Ohio will generate between $175 million and $200 million of combined EBITDA 
and that these properties, along with EBITDA from the newly acquired Harrah's 
St. Louis, will more than offset the effects of additional competition 
surrounding some of Penn's key properties, including its Charles Town and 
Lawrenceburg Casinos.

Pro forma for the incremental debt, we expect Penn's leverage to increase to 
about 5x by the end of 2012, and to remain there over the next two years as 
Penn completes its outlined development projects in Ohio. At the 'BB' rating, 
we expect leverage, including the zero-coupon preferred equity, to track below 
5x over time, although we would tolerate short-term spikes to facilitate 
developments or acquisitions that we believe strengthen Penn's business 
profile. While we expect management to continue to pursue new developments and 
acquisitions, we believe it will continue being diligent in making an 
investment or offering a price that will not meaningfully impair Penn 
National's current financial profile.

Penn National will report third quarter earnings results on October 18, 2012 
and we will update our rationale shortly following the company's earnings 
release.


RELATED CRITERIA AND RESEARCH
     -- Methodology: 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
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 
RATINGS LIST

Penn National Gaming Inc.
 Corporate Credit Rating                      BB/Stable/--

New Ratings
Penn National Gaming Inc.
 $400M incremental term loan A due 2016       BBB-
   Recovery Rating                            1
 $600M incremental term loan B due 2018       BBB-
   Recovery Rating                            1

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