Fitch Rates Borgata's $650MM Term Loan 'BB-/RR2' & Upgrades IDR to 'B'; Affirms Boyd's Ratings
Peninsula is wholly-owned by Boyd but remains as a stand-alone restricted group. Borgata is a 50/50 JV between Boyd and MGM Resorts International (MGM) and is managed by Boyd. Fitch believes that there is strong rating linkage between Boyd and Peninsula credit groups and largely analyzes the two restricted groups on a consolidated basis. Fitch views the rating linkage between Boyd and Borgata as weak and views the credit profiles largely on a stand-alone basis.
BORGATA KEY RATING DRIVERS
Fitch's upgrade of Borgata's IDR to 'B' from 'B-' reflects Borgata improved operations. The Atlantic City market's surviving eight casinos, including Borgata, benefitted from the closure of four casinos in 2014, which removed excess capacity out of the market. Atlantic City also had about three years now to adjust to the new competition in surrounding jurisdictions without significant new casino openings in the interim period. As a result of the easing competitive environment and property tax adjustments Borgata's LTM EBITDA for period ending March 31, 2015 improved to \\$173 million from a trough EBITDA of \\$113 million in FY2013. Accordingly FCF improved to \\$74 million from \\$34 million also helped by reduced interest cost related to a refinancing and debt reduction. Leverage is 4.2x as of March 31, 2015, which together with further reduction in debt provides cushion against moderate operating pressure in the future.
The upgrade also takes into account the refinancing of the 9.875% senior secured notes, which will save approximately \\$10 million - \\$12 million in interest cost per year and improves liquidity. The new term loan comes with a \\$230 million delay draw portion that can be used along with FCF to paydown the original term loan (\\$325 million outstanding as of March 31, 2015) and the \\$14 million outstanding on the revolver. The current credit facility matures in 2018 and the new term loan matures 2023. The covenants on the incremental term loan also offer additional protections relative to the original credit facility. The new term loan's excess cash flow sweep remains intact until leverage declines below 2.5x compared to the existing facility where the sweeps decline once leverage declines below 3.75x. There is also an event trigger, which is triggered if additional licenses are granted in Pennsylvania (within 75 miles of Borgata) or in New Jersey (outside Atlantic City) in which event Borgata cannot pay distributions unless pro forma leverage is less than 3x.
Borgata's 'B' IDR takes into account the possibility of additional competition in Philadelphia, New York's Catskills region and northern New Jersey. The likely timing for the Catskills \\$1 billion casino is 2017, and Fitch expects modest impact on Atlantic City's gaming revenues of approximately 5%. The Philadelphia project's sponsors are facing law suits from the losing license applicants and an incumbent Philadelphia casino; therefore, timing there is less certain. However, the impact from another Philadelphia casino should be muted given that the area already has four casinos.
In New Jersey several bills were introduced this year to allow casinos outside Atlantic City. Although such measures are gaining political momentum and have tentative support from the governor they still need to pass a referendum. Given the short deadline to pass a bill so that the measure can make the 2015 referendum, law makers said that they will hold the bill until 2016. Fitch places a less than 50/50 probability on an expansion measure passing in the near to medium term (one to three years). The idea of casinos being developed outside Atlantic City has not gained much traction yet with the general population as shown by a 2015 Fairleigh Dickenson University with 56% opposing and 37% for casinos outside Atlantic City.
Two well publicized casino proposals in North Jersey include a \\$1 billion Hard Rock branded casino at Meadowlands and a \\$4.6 billion casino resort in Jersey City. Both proposals would be in close proximity to New York City and the more populated areas of North Jersey. Legislative proposals to date generally included high tax rates and revenue share mechanisms with Atlantic City. Should an expansion pass a referendum in 2016 it would take another two to three years at the minimum to grant licenses and open the new casinos (the Meadowland proposal includes a temporary facility that can open sooner).
Although casinos in North Jersey would hurt Borgata there are several offsetting factors which should leave Borgata with a viable business model and under moderate stress scenarios with positive FCF. Fitch estimates that Borgata can withstand approximately a 15%-20% gaming revenue decline before its FCF starts to approach negative. This assumes conservatively that the debt remains at current levels and maintenance capex remains high at about \\$25 million per year. Fitch believes a 15%-20% revenue stress is realistic but is on the high side given Borgata's advantage in terms of its well established loyalty database, brand recognition, high quality amenities and a tax rate advantage. It is also possible that Borgata can further benefit from other casino closures in Atlantic City. Borgata has shown an ability to consolidate market share through the recently difficult operation environment with its market share growing to 27% (LTM period ending June 2015) from 17% in 2006, Atlantic City's peak year.
BOYD/PENINSULA KEY RATING DRIVERS
Boyd's 'B' IDR reflects a diversified asset base and healthy free cash flow (FCF) profile. These positive credit considerations are offset by Boyd's high, albeit sustainable, leverage and significant exposure to weaker regional casino markets.
Fitch calculates gross leverage for Boyd for period ending March 31, 2015 at 7.2x, which includes Peninsula along with the \\$152 million seller's note at Peninsula's HoldCo. This offers minimal equity cushion as regional assets typically trade in 7x-8x multiple range (a bit higher now given the REIT-spin off potential). However, Fitch deems Boyd's capital structure sustainable when taking into account Boyd's healthy FCF profile. Boyd's stand-alone leverage is slightly better at 7x, but Fitch believes including Peninsula in Boyd's ratios is appropriate given the high likelihood that Boyd merges Peninsula into its restricted group in the near to medium term. Boyd has stated that it intends to merge Peninsula into its restricted group and Peninsula's unsecured notes' call premium steps down to 104.188 this August.
Boyd's FCF is strong for its rating level and reflects a limited development pipeline, heavy mix of LIBOR based bank debt and \\$920 million in federal-level NOLs as of Dec. 31, 2014. Fitch estimates Boyd's discretionary FCF run-rate at approximately \\$175 million, which includes about \\$75 million of FCF at Peninsula.
Fitch's estimate for Boyd's FCF run-rate incorporates (estimates include Peninsula):
--\\$536 million of latest 12 months (LTM) property EBITDA for period ending March 31, 2015;
--\\$60 million of corporate expense;
--\\$200 million of interest expense;
--\\$0 of income tax;
--\\$100 million of maintenance CapEx.
The strong FCF profile offsets the risk associated with Boyd's operating mix, which Fitch views unfavorably with a large exposure to mature and competitive regional markets.
BORGATA KEY ASSUMPTIONS
Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
--Fitch projects low single-digit revenue growth in 2015-2016 and mid-single-digit declines in 2017 as competitive properties open in New York and Pennsylvania.
--Free cash flow (FCF) is used to prepay the term loans.
--Distributions to owners begin in 2018.
BOYD KEY ASSUMPTIONS
Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
--Fitch projects flat same store revenue growth across Boyd's operating segments with the Las Vegas segments performing better relative to the regional markets.
--Fitch assumes that state and federal NOLs absorb all tax liability through the rating case horizon.
--Fitch has not incorporated any dividends or share repurchases in its rating case projections.
BORGATA RATING SENSITIVITIES
Positive: Borgata's IDR will likely be capped at 'B' IDR in the near to medium term due to the potential for increased competition. However, future developments that may, individually or collectively, lead to positive rating action include:
--Sentiment for expanding gaming outside Atlantic City diminishes significantly;
--Discretionary run-rate FCF sustaining at close to or above \\$100 million.
Negative: No negative rating action is expected over the next 12-24 months given Borgata's strong financial profile. However, negative rating action may result from:
--Debt/EBITDA approaching 7x;
--Discretionary run-rate FCF/debt declining below 5%.
There could be rating pressure should New Jersey legalize casinos outside Atlantic City. If that occurs Fitch's decision to potentially revise Borgata's Outlook to Negative or downgrade its IDR will depend on the scope of the expansion measure passed (e.g. number of licenses, tax rate, etc.); the locations, size and amenities of the proposed projects; the operating outlook for Atlantic City absent the expansion and management's response in terms of capital allocation decisions and operational adjustments.
BOYD RATING SENSITIVITIES
Positive: No positive rating action is expected over the next 12-24 months given the company's high leverage. However, positive rating action may result from:
--Debt/EBITDA declining below 6x;
--Discretionary run-rate FCF exceeding \\$200 million;
--Regional markets remaining stable or growing on same-store basis;
--Consolidation of Peninsula into Boyd's restricted group.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Boyd's debt/EBITDA ratio excluding Borgata moving towards 8x;
--Discretionary run-rate FCF declining towards or below \\$75 million;
--Operating pressure with same-store revenues declining over an extended period;
--Boyd pursuing a REIT spin-off or an M&A activity that would result in rent adjusted leverage to increase.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Boyd Gaming Corp
--IDR affirmed at 'B'; Outlook Stable;
--Senior secured credit facility affirmed at 'BB/RR1';
--Senior unsecured notes affirmed at 'CCC+/RR6'.
Peninsula Gaming LLC
--IDR affirmed at 'B'; Outlook Stable;
--Senior secured credit facility affirmed at 'BB/RR1';
Peninsula Gaming LLC (Peninsula Gaming Corp. as co-issuer)
--Senior unsecured notes affirmed at 'CCC+/RR6'.
Marina District Finance Company, Inc.
--IDR upgraded to 'B' from 'B-'; Outlook revised to Stable from Positive;
--Senior secured revolver upgraded to 'BB/RR1' from 'BB-/RR1';
--Senior secured notes due 2018 and the incremental term loan due 2018 upgraded to 'BB-/RR2' from 'B+/RR2';
--Incremental term loan due 2023 assigned 'BB-/RR2' rating.
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