OREANDA-NEWS.Fitch Ratings has assigned a 'B-'/'RR5' rating to Boyd Gaming Corp.'s (Boyd) $500 million senior unsecured notes maturing 2026. Boyd's Issuer Default Rating (IDR) is 'B' with a Positive Outlook. See the full list of ratings at the end of this release.

Boyd's announcement of the issuance mentions that the use of proceeds could include, among other potential uses, consolidating Peninsula Gaming LLC (Peninsula) into Boyd's credit group and refinancing Boyd's existing debt. Boyd has 9% notes that become callable at 104.5 in July. Peninsula's 8.375% notes are callable now at 104.188 but there is no premium starting August. If the proceeds are used to refinance debt, Fitch estimates $12 million - $14 million of annual interest expense savings.

KEY RATING DRIVERS

The Positive Outlook reflects Boyd's substantial de-leveraging efforts and improved operations. There is a good probability that Fitch would upgrade Boyd's IDR within 12-24 months if leverage continues to decline and the operating trends remain intact. Boyd's consolidation of Peninsula into its restricted group would be another catalyst for positive rating action.

Consolidated leverage was 6.1x for the period ending Dec. 31, 2015, down from 7.5x a year ago. The deleveraging has been driven by revenue growth across most of Boyd's markets, improved margins and paydown of debt. Fitch expects these broad trends to continue in 2016 and forecasts consolidated leverage to decrease below 6x by year-end 2016. Fitch's forecast takes into account new competition in Biloxi, MS, and the potential softening in Louisiana, a market exposed to the weakening oil industry.

Fitch will look for leverage to sustain below 6x before considering an upgrade. Although Boyd has stated plans to continue to pay down debt and its desire to get leverage to below 5x, the company has a history of debt funding acquisitions (e.g. Peninsula and IP Resort). That said, the company has also shown prudence in the past, mothballing Echelon during the last recession and has taken a more 'wait and see' approach with a REIT spin-off.

FREE CASH FLOW

Boyd has been generating significant free cash flow (FCF) since 2013 due to EBITDA expansion, declining interest costs, minimal tax expense, and modest capex budgets. For the period ending Dec. 31, 2015, Boyd generated $209 million in FCF, which includes $78 million at Peninsula. Opportunistic refinancings and debt paydown contributed to a roughly $60 million decrease in interest expense from 2013 to 2015. Fitch expects Boyd's tax burden to remain minimal thanks to $913 million of federal-level net operating losses (NOLs) as of Dec. 31, 2015.

Fitch estimates Boyd's discretionary FCF run-rate at approximately $250 million. The estimate (including Peninsula) incorporates:

--$588 million of trailing 12-month property EBITDA for the period ending Dec. 31, 2015;
--$60 million of corporate expense;
--$180 million of interest expense (does not include potential interest expense savings);
--$0 of income tax;
--$110 million of maintenance capex;
--$15 million of Borgata distributions.

Boyd has recently benefitted from a more robust recovery in the Las Vegas Locals and Downtown Las Vegas markets, which comprise 27% and 8% of latest 12 month (LTM) EBITDA, respectively. The Las Vegas Locals market's LTM gaming revenues grew by 2.3% during 2015. Supporting these gains are limited new competition and strength in the underlying economic fundamentals of the region, as seen by trends in employment, housing, and consumer spending. Fitch is positive on the Las Vegas Strip and the Las Vegas Locals market indirectly benefits from underlying strength on the Strip.

The remainder of Boyd's operating exposure is in regional markets, for which Fitch has a more muted outlook. A number of Boyd's markets have been subject to new supply pressures (Biloxi, Lake Charles) and energy-related economic weakness (Louisiana). Fitch views Boyd's capex initiatives regarding food & beverage and hotel upgrades positively as they help keep Boyd properties competitive and have helped drive incremental EBITDA growth.

THE NOTES UPGRADE

The upgrade of Boyd's unsecured notes on March 10, 2016 reflects the improved recovery prospects, as Boyd has been paying down debt at its credit group and Peninsula using FCF. Additionally, the reduction in debt and increased EBITDA at Borgata and the repayment of the seller note at Peninsula increased the residual equity value from these entities, benefitting the company.

In the event Boyd consolidates Peninsula into its restricted group using additional secured debt to refinance Peninsula's debt, Fitch feels comfortable that Boyd's unsecured notes will retain the 'RR5' Recovery Rating (equates to 11%-30% recovery). If Boyd uses only secured debt to refinance all of Peninsula's debt, its secured leverage should not exceed 4.5x.

If Boyd uses a considerable mix of unsecured debt to refinance Peninsula's debt, an upgrade of the unsecured notes to 'B/RR4' is possible.

KEY ASSUMPTIONS

Fitch's expectations are based on our 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. Fitch assumes distributions received from Borgata are steady at about $15 million per year.
--FCF is used to prepay the Boyd credit facility at a similar pace to recent trends.

BOYD RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Debt/EBITDA declining and remaining below 6x (Fitch forecasts 5.6x and 5.2x for 2016 and 2017, respectively);
--Discretionary run-rate FCF exceeding $200 million on sustained basis (Fitch forecasts $255 million and $283 million for 2016 and 2017, respectively);
--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 (Fitch forecasts 5.6x and 5.2x for 2016 and 2017, respectively);
--Discretionary run-rate FCF declining towards or below $75 million (Fitch forecasts $255 million and $283 million for 2016 and 2017, respectively);
--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 RATINGS

Boyd Gaming Corp
--IDR 'B'; Outlook Positive;
--Senior secured credit 'BB/RR1';
--Senior unsecured notes 'B-/RR5.

Peninsula Gaming LLC
--IDR 'B'; Outlook Positive;
--Senior secured credit facility 'BB/RR1'.

Peninsula Gaming LLC (Peninsula Gaming Corp. as co-issuer)
--Senior unsecured 'B-/RR5'.