OREANDA-NEWS. S&P Global Ratings today said it lowered its corporate credit rating on Las Vegas-based Affinity Gaming to 'B' from 'B+'. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's first-lien credit facility to 'B+' from 'BB-'. The recovery rating on the first-lien facility remains '2', reflecting our expectation for substantial recovery (70% to 90%; lower half of the range) for lenders in the event of a payment default.

We removed all ratings from CreditWatch, where we had placed them with negative implications on Aug. 24, 2016.

In addition, we assigned a 'CCC+' issue-level rating and '6' recovery rating to Affinity's proposed $95 million second-lien term loan facility due 2024. The '6' recovery rating reflects our expectation for negligible recovery (0 to 10%) for lenders in the event of a payment default.

Affinity plans to use proceeds from the proposed debt issuance and a modest draw on its $75 million revolver, along with excess cash on hand and an equity contribution from the new owner, Z Capital, to finance the buyout of the remaining equity that Z Capital does not already own and to pay transaction fees and expenses.

"The downgrade reflects our expectation that lease-adjusted leverage will deteriorate to around 6x in 2016 as a result of the incremental debt that Affinity is incurring to fund Z Capital's buyout of the company," said S&P Global Ratings credit analyst Stephen Pagano.

While we anticipate the company will continue to improve its operations and grow its EBITDA through cost rationalization at the company, helping to improve leverage to the mid - to high-5x area by 2017, the downgrade also reflects a change in our assessment of Affinity's financial policy because it will now be controlled by a financial sponsor and is demonstrating a willingness to sustain leverage above 5x for a prolonged period of time under its new ownership structure. Despite the expected improvement in leverage in 2017, our revised FS-6 financial policy assessment incorporates the risk that Z Capital could increase leverage in future periods to fund distributions, acquisitions, or development spending over time keeping leverage in the 5x area over the longer term.

The stable outlook reflects our expectation that, despite a spike in leverage to around 6x in 2016 after the debt-funded acquisition by Z Capital, Affinity will continue to improve its operations and grow its EBITDA through rationalizing the cost structure, such that lease-adjusted leverage will improve to the mid - to high-5x area in 2017.