September 13, 2012 / 6:26 PM / 5 years ago

TEXT-S&P may raise Cannery Casino 'B-' rating

Overview
     -- U.S. gaming operator Cannery Casino Resorts (Cannery) plans to issue 
$565 million in credit facilities to refinance its existing debt.
     -- We are assigning our preliminary 'BB-' issue-level and preliminary '1' 
recovery ratings to the proposed first-lien senior secured credit facilities 
and our preliminary 'CCC+' issue-level and preliminary '6' recovery ratings to 
the proposed second-lien senior secured credit facilities.
     -- We are also placing our 'B-' corporate credit rating on the company on 
CreditWatch with positive implications.
     -- The CreditWatch listing reflects our expectation that we will raise 
our corporate credit rating on Cannery to 'B' upon the close of the proposed 
transaction, as we believe the proposed refinancing improves the company's 
financial risk profile to the extent a higher rating is warranted. 

Rating Action
On Sept. 13, 2012, Standard & Poor's Ratings Services placed its 'B-' 
corporate credit rating on Las Vegas-based Cannery Casino Resorts LLC 
(Cannery) on CreditWatch with positive implications.

At the same time, we assigned our preliminary 'BB-' issue-level rating to 
Cannery's proposed $390 million first-lien credit facilities. We also assigned 
this debt our preliminary recovery rating of '1', indicating our expectation 
of very high (90% to 100%) recovery for lenders in the event of a payment 
default. The proposed facility consists of a $40 million senior secured 
revolving credit facility due 2017 and a $350 million senior secured term loan 
due 2018. 

In addition, we assigned our preliminary 'CCC+' rating to Cannery's proposed 
$175 million second-lien senior secured term loan due 2019, and we assigned 
this debt our preliminary recovery rating of '6', indicating our expectation 
of negligible (0% to 10%) recovery for lenders in the event of a payment 
default. 

Cannery expects to use proceeds from the issuance to refinance its existing 
credit facilities and repay $62.8 million of its preferred stock. In 
conjunction with the transaction, $38.0 million of the preferred stock will 
also be converted to common equity, such that only $24.2 million of the 
preferred will be outstanding pro forma for the transaction. Our preliminary 
ratings are subject to our review of final documentation. 

Rationale
The CreditWatch listing reflects our expectation that we will raise our 
corporate credit rating on Cannery to 'B' from 'B-' after the transaction 
closes. The upgrade would reflect the elimination of near-term covenant and 
refinancing concerns, as well as the reduction of a large portion of Cannery's 
preferred stock (which we view as debt). Although Cannery will have lower cash 
interest coverage as a result of the transaction (moving from the mid-2x to 
the high-1x area), over the longer term, we believe this transaction provides 
a more manageable capital structure as it eliminates a large portion of the 
preferred stock (the preferred accrues at 20% rate).

Although Cannery has improved its financial profile we still view the 
financial risk profile as "highly leveraged," according to our criteria, given 
the company's high debt balances and our projection that debt to EBITDA will 
remain above 6.5x through 2013.  

We expect EBITDA will be relatively flat in 2012, driven by modest growth at 
the Meadows Casino in Pennsylvania and flat growth at Cannery's Las Vegas 
locals properties. We expect EBITDA at the Meadows (almost two-thirds of 
Cannery's EBITDA during the 12 months ended June 2012) will increase in the 
mid-single digits, driven by modest growth in gaming revenues and a reduction 
in the table game tax rate to 14% from 16% (effective September 2012), which 
should drive some modest margin improvement. We do not expect the recent 
opening of Horseshoe Casino Cleveland (about 150 miles away) to have more than 
a marginal impact on Meadows' operating performance, as we believe the Meadows 
attracts the majority of its customers within a 50-mile radius. Similarly, 
over the intermediate term, we do not believe potential casinos in Youngstown, 
Ohio (about 100 miles away) and at Nemacolin Woodlands (about 60 miles away 
and expected to open in the third quarter of 2013) will have a meaningful 
impact on the Meadows revenue given their expected scope and distance from the 
Meadows.

We believe that some gradually improving economic indicators in Las Vegas, 
such as convention attendance, visitor volume, and room rates on the Las Vegas 
Strip, will spur modest improvement in the Las Vegas locals market over the 
next few years. However, we expect improvement in the locals market to 
somewhat lag improvement on the Las Vegas Strip. We do not anticipate a return 
to meaningful growth or to previously generated levels of revenue and EBITDA 
in the locals market over at least the next few years. In 2012, we expect 
declines across Cannery's Las Vegas locals properties, largely the result of 
the loss of EBITDA from the Rampart Casino following the end of its lease 
earlier this year. We believe, however, that improvement in performance at the 
company's other properties in 2012, and incremental EBITDA from Cannery's 
consulting contract with a Native American tribe, will largely offset the loss 
of cash flow from Rampart and result in modest growth in consolidated EBITDA. 
For 2013, our preliminary expectation for Cannery's consolidated operations is 
for flat to low-single-digit growth in revenue and EBITDA.

CreditWatch
In resolving the CreditWatch listing, we will monitor Cannery's progress 
toward completing its proposed refinancing transaction. After the transaction 
closes and we have reviewed the executed documentation, we expect to raise our 
corporate credit rating to 'B'. If Cannery does not successfully close its 
transaction, we likely would affirm our 'B-' rating and remove it from 
CreditWatch. However, failure to close the proposed transaction would likely 
bring into question Cannery's ability to meet its upcoming maturities and 
result in a negative rating outlook.

Related Criteria And Research
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Placed On CreditWatch
                                        To                 From
Cannery Casino Resorts LLC
 Corporate Credit Rating                B-/Watch Pos/--    B-/Stable/--

New Ratings

Cannery Casino Resorts LLC
 Senior Secured
  $175 mil. 2nd-lien term loan due 2019 CCC+(prelim)
   Recovery Rating                      6(prelim)                  
  $40 mil. revolving cred fac due 2017  BB-(prelim)
   Recovery Rating                      1(prelim)                  
  $350 mil. term loan due 2018          BB-(prelim)
   Recovery Rating                      1(prelim)                  

Ratings Affirmed

Cannery Casino Resorts LLC
 Senior Secured 1st-lien                B
   Recovery Rating                      2
 Senior Secured 2nd-lien                CCC
   Recovery Rating                      6

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below