OREANDA-NEWS. Fitch Ratings has placed Pinnacle Entertainment Inc.'s (PNK) 'B+' Issuer Default Rating (IDR) on Rating Watch Positive and PNK's issue ratings on Rating Watch Evolving following PNK's announcement that it will be acquired by Gaming and Leisure Properties, Inc. (GLPI), which will assume $2.7 billion of PNK's debt.

The Rating Watch reflects Fitch's view of GLPI's credit profile, which is seen by Fitch as stronger than PNK's current credit profile. GLPI plans to have a 5.5x debt/EBITDA ratio pro forma for the purchase and will benefit from having master leases with two large and diversified operating companies. GLPI has in place committed financing and plans to refinance PNK's debt when transactions close.

KEY RATING DRIVERS

The Rating Watch Evolving on PNK's debt instruments reflects the uncertainty regarding which instruments (if any) will be allocated to PropCo vs. the newly formed OpCo, the PropCo's and OpCo's pro forma capital structures and the timing of the refinancings of PNK's debt. (Public disclosure is not clear if the OpCo will assume the debt first before refinancing its share of debt at PNK.) However, the covenants of the PNK's existing debt instruments prohibit asset transfers unless PNK uses proceeds to repay its debt. Therefore, Fitch thinks it is likely that the OpCo's portion of PNK's debt will be refinanced at PNK prior to or concurrently with the OpCo/PropCo split.

PNK's OpCo will refinance the remaining $1 billion of debt at PNK with its own committed financing. Fitch views PNK's planned OpCo more negative relative to PNK's existing credit profile. Fitch estimates the OpCo's pro forma rent adjusted leverage (using 8-times multiple for rent adjustment) and run-rate FCF to EBITDAR based on company guidance at 6.2x and 16%, respectively. This compares to approximately 5.6x and 44%, respectively, absent the announced transactions. Fitch believes that with lower FCF/EBITDAR ratio, the OpCo's FCF will have a higher sensitivity to any potential operating pressures. That said Fitch will likely view OpCo's credit profile as being consistent with a 'B' category IDR.

As proposed PNK will spin-off its operations into a newly created OpCo, which will lease the assets from the legacy PNK (PropCo). GLPI will then purchase PNK's PropCo with PNK shareholders receiving stock in GLPI. PNK's shareholders will end up owning 100% of the new OpCo and approximately 27% of GLPI. Pro forma for transactions, the OpCo's EBITDAR after corporate expense will cover the rent to GLPI at 1.7x and Pinnacle's guidance for run-rate FCF is $101 million.

KEY ASSUMPTIONS
Fitch relied on GLPI's and PNK's guidance. Notable assumptions include:
--Initial rent of $377 million;
--Pro forma non-adjusted leverage at OpCo and GLPI of 3.5x and 5.5x, respectively;
--OpCo's pro forma EBITDAR and FCF of $635 million and $101 million.

RATING SENSITIVITIES
Should the transactions close as planned Fitch will withdraw ratings on PNK. However, in event the debt instruments are allocated to the PropCo and/or OpCo and remain at these respective entities (i.e. not refinanced), Fitch would likely view the PNK legacy debt at the OpCo less favorably than the same debt at the PropCo. Should the transaction not go through Fitch would take the Rating Watch Positive off from PNK's IDR. Prior to the GLPI asset sale announcement Fitch had PNK's IDR on Negative Rating Outlook, which took into account PNK's plan to spin-off its assets into a stand-alone REIT.

FULL LIST OF RATING ACTIONS

Pinnacle Entertainment Inc
--IDR 'B+' placed on Rating Watch Positive;
--Senior secured credit facility 'BB+/RR1' placed on Rating Watch Evolving;
--Senior unsecured notes 'BB-/RR3' placed on Rating Watch Evolving;
--Subordinated notes 'B-/RR6' placed on Rating Watch Evolving.