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Fitch Affirms Boyd Gaming's IDR at 'B+'; Outlook to Positive
August 4, 2017 / 1:27 PM / 14 days ago

Fitch Affirms Boyd Gaming's IDR at 'B+'; Outlook to Positive

(The following statement was released by the rating agency) NEW YORK, August 04 (Fitch) Fitch Ratings has affirmed Boyd Gaming Corp.'s (Boyd, BYD) Issuer Default Rating (IDR) at 'B+'. In addition, Fitch has affirmed Boyd's senior secured credit facility at 'BB+/RR1' and senior unsecured notes at 'B+/RR4'. The Rating Outlook was revised to Positive from Stable due to Fitch's expectation Boyd will de-lever below 5.0x gross leverage in the next one-two years through a combination of EBITDA growth and debt paydown. KEY RATING DRIVERS Improving Credit Profile: Fitch forecasts Boyd's leverage to continue to decline, reaching 5.2x and 4.9x in 2017 and 2018, respectively, driven by EBITDA growth from recent acquisitions and debt paydown. An upgrade of BYD's IDR to 'BB-' is possible if Boyd's leverage remains below 5.0x and the company's capital allocation decisions and public comments remain in line with its currently stated target of maintaining leverage between 4x and 5x. FCF Supports IDR: Boyd generates healthy FCF, which creates some cushion against potential operating pressure. Fitch expects annual FCF before dividends in excess of $300 million through the forecast period. Fitch expects FCF use to be balanced between debt paydown and shareholder returns in the form of Boyd's new quarterly dividend (~$23 million per year) and opportunistic share repurchases. In the event of future acquisitions that drive leverage in excess of 5x, an increase in debt paydown to delever back below 5x in a reasonable timeframe would also support an upgrade to 'BB-'. Greater Las Vegas Locals Exposure: Pro forma for acquiring Las Vegas assets, the Las Vegas Locals and Las Vegas Downtown segments make up 38% and 8% of the company's property EBITDA, respectively. We are more optimistic on Boyd's Las Vegas segments relative to other regional markets given the high level of economic activity in the area; although we caution these segments showed higher volatility during the last downturn. Challenging Regional Gaming Markets: Over 50% of property EBITDA is generated in the mature and, in certain cases, energy-exposed Midwest and Southern markets (segment revenues declined 3.4% in last 12 months ended June 30). Overall, U.S. regional markets are up roughly 1.5% year-to-date through June on a same-store basis, driven primarily by the continued ramp-up of newer markets, where Boyd's presence is minimal. REIT Risk: Fitch places a lower than 50/50 probability of a REIT transaction occurring. Boyd had over five years to consider one since Penn National first announced it in November 2012 and three years since Boyd said it was considering a REIT itself. The company still has a meaningful amount of net operating losses (NOLs), is closely held, and its $1.5 billion of senior notes have restrictive covenants regarding asset sales and transfers. The economic rationale for a REIT spin-off or a sale-leaseback is becoming diluted given the increase in trading multiples for regional gaming operators and the prospect of a rising interest rate environment. DERIVATION SUMMARY Boyd's rent-adjusted leverage and FCF generation are some of the strongest among U.S. regional gaming operators. Boyd's credit profile is better positioned than peers Penn National Gaming and Pinnacle Entertainment Corp. as it still owns its underlying real estate and is not subject to the high operating leverage gaming OpCos have from master leases. As a result, Boyd's FCFs are more sustainable under moderate operating pressures, similar to other more traditional gaming operators that still own their underlying real estate (e.g. Red Rock Resorts, Eldorado Resorts). Boyd also has outsized exposure to the Las Vegas Locals market, of which Fitch has a more favorable view relative to other regional gaming markets. Offsetting these positives is the cyclical nature of regional gaming, underlying secular headwinds (including demographic shift and alternatives to casino gaming), and the industry's capital intensity. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Low single-digit same-store revenue growth for Las Vegas Locals and Downtown Las Vegas segments. Low single-digit declines in Boyd's Midwest & South segment. --Margins increase slightly through 2020 driven by Las Vegas Locals, reflecting the segment's larger scale and revenue flowthrough. --$62 million EBITDA from Aliante and Cannery assets. No additional acquisitions are assumed. --State and federal NOLs absorb all tax liability through the forecast horizon. --Capex slightly elevated in 2017 as F&B initiative winds down, with run-rate maintenance capex at $125 million per year thereafter. --Uses of cash include debt paydown, $23 million in annual dividends, and $100 million in annual share repurchases (Fitch's assumption). KEY RECOVERY RATING ASSUMPTIONS --The recovery analysis assumes that Boyd would be considered a going-concern in bankruptcy and that the company would be reorganized rather than liquidated. --We have assumed a 10% administrative claim. --The going-concern EBITDA reflects stresses at Boyd's segments of 15%-20% below LTM levels (adjusted for recent acquisitions). This reflects a moderate recessionary environment with revenue declines of 7%-11% and 50% flow-through to EBITDA. This is slightly better than Boyd's performance in the previous recession as all three of Boyd's segments have not yet fully recovered to pre-recession levels. --Fitch's recovery analysis is based on EV multiples that are slightly below historical market and M&A-implied multiples. This is to account for the difficulty of estimating multiples at the time of default, which could be several years out for healthier issuers. Fitch assigns 6.5x multiples to the Midwest & South segment, 6x to Downtown and 7x to Las Vegas Locals. Actual M&A-implied multiples for regional assets have been around 7.0x-7.5x. --Assumes a full draw on Boyd's revolver, which has $775 million in capacity and $482 million in availability as of March 31, 2017. --The waterfall results in a 100% recovery corresponding to an 'RR1' recovery for the senior secured credit facility. The waterfall also indicated a 45% recovery corresponding to 'RR4' for the senior unsecured notes. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Debt/EBITDA declining and remaining below 5.0x (Fitch forecasts 4.9x for 2018); --Discretionary run-rate FCF exceeding $300 million on sustained basis (Fitch forecasts $308 million for 2018); --Regional markets remaining stable or growing on same-store basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Boyd's debt/EBITDA ratio remaining above 6.0x on a sustained basis (Fitch forecasts 4.9x for 2018); --Discretionary run-rate FCF declining towards or below $150 million (Fitch forecasts $308 million for 2018); --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 increasing. LIQUIDITY Strong Liquidity: Boyd had $482 million available on its $775 million revolver as of March 31, 2017, Fitch forecasts Boyd's FCF at $293 million for 2017, and Boyd has no meaningful maturities until 2021 when the revolver ($280 million outstanding as of March 31, 2017) and term loan A ($219 million prior to any required prepayments) mature. There are no major developments and run-rate maintenance capex of $125 million is also manageable. Boyd's strong FCF generation allows some cushion for moderate operating stress or a more aggressive return of shareholder value. FULL LIST OF RATING ACTIONS Boyd Gaming Corp. --IDR affirmed at 'B+'; Outlook to Positive from Stable; --Senior secured credit facility affirmed at 'BB+/RR1'; --Senior unsecured notes affirmed at 'B+/RR4'. Contact: Primary Analyst Colin Mansfield, CFA Director +1-212-908-0899 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Alex Bumazhny, CFA Senior Director +1-212-908-9179 Committee Chairperson David Silverman, CFA Senior Director +1-212-908-0840 Summary of Financial Statement Adjustments Fitch does not make any additional adjustments not already made by management. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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