PNK - Fitch Affirms Pinnacle Entertainment's IDR at 'B'; Outlook to Positive
1 days 23 hours 39 minutes ago - BusinessWire via Comtex
Fitch Ratings affirms Pinnacle Entertainment, Inc's (Pinnacle) Issuer Default Rating (IDR) at 'B'. Fitch also affirms Pinnacle's $410 million senior secured credit facility and approximately $450 million in senior unsecured notes at 'BB/RR1' and roughly $725 million of subordinated notes at 'B-/RR5'. The Rating Outlook is revised to Positive from Stable.
The Outlook revision to Positive reflects Pinnacle's strong operating performance, particularly in the Lake Charles and St. Louis markets; the near-term horizon for the L'Auberge Baton Rouge project opening (summer 2012); and its solid liquidity position.
With the L'Auberge Baton Rouge opening, Pinnacle should have leading positions in three distinct markets. Baton Rouge, along with the continued ramp up at Pinnacle's two St. Louis properties and market leading position in Lake Charles, offers the credit a level of diversification and competitive position that is more commensurate with the higher-end of the 'B' category.
The Positive Outlook suggests that there is a good likelihood of an upgrade to a 'B+' IDR over the next 12-24 months. However, the upgrade would be contingent on Pinnacle's financial profile being able to absorb new competition that is expected to come online around the 2013-2014 timeframe.
Fitch's base case, which is consistent with an upgrade scenario, reflects EBITDA approaching $300 million and leverage in the mid-4 times (x) range once Baton Rouge opening anniversaries in the second half of 2013 but before competition opens and begins to ramp up. This scenario does not take into account drawing on the revolver to fund the installation of slots at River Downs, which may temporarily push leverage closer to 5x as the project reaches completion.
Around the 2013-2014 timeframe, there is the potential that Creative Casinos may open its $400 million Mojito Pointe project in Lake Charles. Pinnacle's L'Auberge Lake Charles accounts for about a third of Pinnacle's property EBITDA pro forma for the Baton Rouge opening and captures roughly half of the market share in Lake Charles. Also around the same timeframe, Rock Ohio Caesars' Horseshoe Cincinnati will open in second-quarter 2013 (impacts Belterra), and there could be another casino in Bossier City by 2013 (impacts Bossier City Boomtown).
Fitch expects Pinnacle's leverage to remain below or close to 5.0x as these projects ramp up, with enough cushion for a 20%-30% EBITDA decline in Lake Charles; 15%-20% declines at Bossier City Boomtown and Belterra; and a slow ramp up of L'Auberge Baton Rouge.
On a latest 12 months (LTM) basis as of Sept. 30, 2011, reported consolidated adjusted EBITDA was roughly $242 million compared to $1.2 billion in debt for a debt/EBITDA leverage ratio of 5.0x. With interest expense running in the $105-$110 million range, EBITDA/interest coverage is around 2.3x on an LTM basis. Fitch's base case forecasts this ratio to remain comfortably above 2x as the new competition ramps up.
Drivers that may place negative pressure on Pinnacle's ratings and cause Fitch to revise the Outlook back to Stable include:
--Pinnacle undertaking a significant development outside of River City phase II or outfitting River Downs for video lottery terminals (VLTs);
--Texas legalizing gaming in its 2013 legislative session, which would place pressure on Pinnacle's Lake Charles and Bossier City markets;
--General operating underperformance relative to Fitch's base case pressuring discretionary FCF to well below $100 million before competing facilities open;
--Deterioration in the macro-economic environment. Fitch's base case currently incorporates the continuation of a slow-growth recovery in the U.S.
Fitch considers it unlikely that Pinnacle's IDR will move beyond 'B+' in the foreseeable future taking into account the company's relatively small size, high exposure to limited number of markets, and the tendency to be an active developer. The ratings also take into account a longer-term leverage target in the 4x-5x range, with the potential for temporary spikes slightly above this range due to conservatively funded development projects.
The higher-end of the 'B' category would give Pinnacle credit for the prudent bottom-up building of its capital structure; leading, high quality assets in three distinct markets; increased focus on operating efficiencies, and solid liquidity.
Adequate Capital to Fund Project Pipeline:
Pinnacle's available liquidity as of Sept. 30, 2011 is at approximately $386 million, comprised of $368 million available on its recently expanded credit facility and $18 million of excess cash. Additional near-term sources of capital include $25 million expected from the Baton Rouge construction escrow once the project opens and $22.5 million from the sale of Pinnacle's Reno casino and related land for a total of $434 million in sources to fund Pinnacle's $500 million-plus project pipeline.
Project funding requirements include about $260 million that remains to be funded at Baton Rouge, $82 million for River City phase II and $175 million-$200 million to install VLTs at River Downs. This implies an $85 million-$110 million funding shortfall, which Fitch thinks can be adequately covered by Pinnacle's discretionary free cash flow (FCF) (remains in excess of $90 million annually in Fitch's base case).
Solid Liquidity with Good Discretionary FCF Prospects:
Pinnacle has no maturities until $375 million of its 7.5% subordinated notes comes due in 2015, although the 7.5% notes have to be refinanced by December 2014 to avoid an acceleration of the revolver maturity. Covenant headroom is ample and was expanded when the credit facility was amended in August 2011. Pinnacle's leverage is likely to peak in the third-quarter 2012, or right before the opening of Baton Rouge, at which point leverage should be well below the total leverage covenant threshold of 7.75x.
Fitch considers Pinnacle's discretionary FCF profile within the following base case context:
--Adjusted EBITDA in the $250 million-$290 million range. This takes into account the Baton Rouge opening and the anticipated cannibalization from the expected competition but excludes the potential EBITDA from the VLTs at River Downs.
--Interest expense in the $105 million-$130 million range, with the higher end of the range assuming that Pinnacle draws on the revolver to fund VLT installation at River Downs.
--Cash based tax expense at around $5 million and maintenance capital expenditures in the $50 million-$65 million range.
The above ranges would imply a discretionary FCF range of $50 million-$130 million. Discretionary FCF for the LTM period ending Sept. 30, 2011 is roughly $90 million.
Based on Fitch's recovery analysis, the top of Pinnacle's capital structure is well over-collateralized resulting in recovery values that are solid relative to their ranking in the capital structure.
Fitch rates both the bank facility and senior unsecured debt 'BB/RR1', estimating full recovery in the event of default based on the current capital structure. In its Recovery Rating (RR) analysis, Fitch estimates an adjusted enterprise value (EV) for creditor claims of more than $1.2 billion. This comfortably covers the $410 million credit facility capacity ($32 million outstanding) and the $450 million of unsecured notes. As a result, Fitch assigns an unsecured debt rating of 'BB/RR1', reflecting a three-notch positive differential from the IDR, which is above the cap of two notches in Fitch's RR criteria.
The subordinated debt rating is 'B-/RR5' (11%-30% recovery estimate), which benefited from the downsizing of the bank facility in February 2010 to $375 million from $531 million (subsequently upsized to $410 million).
As senior debt availability increases or is issued, there could be additional rating pressure on the RRs for the subordinated and possibly the senior unsecured debt. Pinnacle's current project pipeline is fully funded, so incremental debt issuance would be discretionary/opportunistic at this point.
In the case of an upgrade of the IDR to 'B+', Fitch may revise the Recovery Rating on the senior unsecured notes to 'RR2', implying a two notch differentiation from the IDR. This would be to differentiate the rating on the senior unsecured notes from the rating on the senior secured revolver.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (May 13, 2011);
--'Pinnacle Entertainment, Inc. Full Rating Report' (Dec. 12, 2010);
--'U.S. Gaming Operators' Recovery Models' (Jan. 4, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489
Pinnacle Entertainment, Inc. -- Amended http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=585205
U.S. Gaming Recovery Analyses -- Third-Quarter 2011 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=664815
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SOURCE: Fitch Ratings
Alex Bumazhny, CFA
One State Street Plaza
New York, NY 10004
Michael Paladino, CFA
Jamie Rizzo, CFA