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S&P rates Graton Economic Development Authority notes 'B'
September 26, 2012 / 7:41 PM / 5 years ago

S&P rates Graton Economic Development Authority notes 'B'

Overview
     -- Graton Economic Development Authority (the Authority) issued a $375 
million senior secured term loan and $450 million in senior secured notes, 
which it will primarily use to finance the construction of the Graton Resort & 
Casino and repay a portion of existing debt.
     -- We are assigning the senior secured term loan and the senior secured 
notes our 'B' issue-level rating. 
     -- We are also assigning our 'B' issuer credit rating to the Authority.
     -- The stable rating outlook reflects our belief that despite substantial 
debt funding, the property will ramp up steadily to generate sufficient cash 
to service the capital structure. 
 
Rating Action
On Sept. 26, 2012, Standard & Poor's Ratings Services assigned Rohnert Park, 
Calif.-based Graton Economic Development Authority (the Authority) its 'B' 
issuer credit rating. The rating outlook is stable. The Authority is a wholly 
owned unincorporated instrumentality of the Federated Indians of Graton 
Rancheria (the Tribe).

At the same time, we assigned the Authority's $375 million senior secured term 
loan due 2018 and $450 million in senior secured notes due 2019 our 'B' 
issue-level rating (the same as our issuer credit rating). The senior secured 
term loan and senior secured notes are pari passu. The Authority also raised a 
$25 million priority revolving credit facility, which we will not rate. 
Additionally, pro forma for the transaction, the Authority will have $50 
million outstanding in a management loan (manager loan), which is held by a 
subsidiary of Station Casinos LLC and will be subordinated to the senior 
secured notes and senior secured term loan.

We do not assign recovery ratings to Native American debt issues because there 
are sufficient uncertainties surrounding the exercise of creditor rights 
against a sovereign nation, including whether the Bankruptcy Code would apply, 
whether a U.S. court would ultimately be the appropriate venue to settle such 
a matter, and to what extent a creditor would be able to enforce any judgment 
against the sovereign nation.

The company plans to use proceeds from the proposed transaction to:
     -- Fund the development and construction of the Graton Resort and Casino 
(the casino);
     -- Establish an interest reserve to fund debt service during the 
construction period and the first several months following the opening of the 
casino;
     -- Repay $175 million of the outstanding manager loan; 
     -- Fund ongoing Tribal costs; and
     -- Fund transaction fees and expenses.
 
Rationale
Our 'B' issuer credit rating on the Authority reflects our assessment of its 
business risk profile as "weak" and its financial risk profile as "highly 
leveraged," according to our criteria.

Our assessment of the business risk profile as weak reflects the vulnerability 
of new gaming projects to uncertain demand and difficulties managing initial 
costs, which can lead to poor profitability during the first several months of 
operations, as well as the Authority's reliance on a single asset to meet debt 
service needs. These risks are somewhat mitigated by our expectation for the 
property to be the highest asset quality in proximity to the San Francisco 
market, a somewhat protected market position, and an experienced property 
manager in Station. However, although there are approximately 2.1 million 
adults within a 60-minute drive of the property, we see some risk in the fact 
that the adult population within 30 minutes of the property is only about 
354,000 people.

Our assessment of the Authority's financial risk profile as highly leveraged 
reflects a large debt burden and the challenge that new casino properties 
often face when trying to ramp up cash flow quickly enough to satisfy fixed 
charges. Despite these risks, we are forecasting that the property will 
generate excess cash flow to facilitate deleveraging, beginning in its first 
full year, and have EBITDAM (earnings before interest depreciation and 
management fees) coverage of interest in the high-1x area at the end of 2014, 
reaching the high-2x area at the end of 2016. 

We expect the facility, located in Rohnert Park, Calif., approximately 60 
minutes from San Francisco, will feature at opening:
     -- 3,000 Class III slot machines, 134 table games, and 18 poker tables;
     -- Four full-service restaurants and nine quick-service offerings in the 
Marketplace food court; and
     -- 5,700 parking spaces, both surface parking, and approximately 1,800 
spaces in a five-level garage.
 
The authority has entered into a guaranteed maximum price contract (GMP) with 
its contractors covering 80% of hard construction costs. The GMP, along with a 
contingency of 19% of hard costs, largely mitigates the risk of construction 
delays and cost overruns, in our view. 

Station will manage the casino on behalf of the Tribe through SC Sonoma 
Management LLC, a subsidiary created for the purpose of managing the property. 
Terms of the management agreement require the payment of a management fee for 
seven years after the opening of the casino equal to approximately 24% of net 
revenues (as defined by the management agreement; essentially net revenue 
minus operating expenses). While the majority of the management fee will be 
subordinated to debt service, Station will receive a priority management fee 
of $6 million.

The Tribe is a federally recognized Native American tribe with 1,300 enrolled 
members. Its reservation is approximately 254 contiguous acres, over 60 of 
which have been set aside for the Casino. A seven-member council governs the 
Tribe, with members elected every two years. We expect distributions from the 
Authority will fund the vast majority of the tribal expenditures, as the Tribe 
has limited sources of other funds.

Performance expectations
We expect net revenue to be in the high $300 million area in 2014, ramping up 
to around $440 million in 2016. In our view, the property will likely generate 
gaming revenue that is substantially higher than most of its competitors in 
the Northern California Region (including both San Francisco and Sacramento), 
given its location advantage, size, and amenities. We believe our assumptions 
are in line when compared with other gaming markets around the U.S., based on 
population and income statistics. In addition to taking share from existing 
operators in the Northern California Region, we believe the property will 
likely spur incremental gaming revenue in the region given its expected 
quality and proximity to San Francisco. Additionally, we believe the property 
should benefit from Station as the manager, which not only has extensive 
experience in local market casinos, but also has experience in the surrounding 
markets, as it previously managed the Thunder Valley casino near Sacramento, 
Calif.

We forecast EBITDAM margins in the mid-40% range. In our calculation of 
EBITDAM, we have subtracted the priority management fee and a priority 
distribution to the Tribe (a total of $12 million, $6 million to each). 
Additionally, we have incorporated a payment to Kenwood Investments No. 2 
(Kenwood), a consultant to the Tribe.

Under our performance expectations, we expect EBITDAM coverage of interest in 
the high 1x at the end of 2014, reaching the high 2x at the end of 2016. We 
expect total debt to EBITDAM slightly below 5x at the end of 2014, improving 
to the low-3x area at the end of 2016. The expected improvement in credit 
measures reflects the growth in EBITDAM as the property matures and scheduled 
debt repayments under the proposed credit agreement.

Liquidity
Based on the capital structure and incorporating our performance expectations, 
we assess the Authority's liquidity profile as "adequate," according to our 
criteria. Our assessment includes the following expectations:
     -- We expect sources of liquidity over the next 12 to 18 months to cover 
uses by around 1.2x. 
     -- We believe that net sources would be positive following the property's 
ramp-up period, even if EBITDA is 15% lower than our current expectations.
 
Sources of liquidity will include funds from the financing (including the $25 
million revolver, which we assume will not be drawn at the time of opening). 
Uses will include the development and construction costs of the casino, 
interest expense, the repayment of existing debt, ongoing Tribal 
distributions, and transaction fees and expenses. Interest on the manager loan 
will be paid in kind (PIK) at a rate of 11.625% until the opening of the 
casino, at which point it will convert to cash payment.

After the casino opens, payments of the priority management fee and tribal 
distributions also begin. In addition to priority tribal distributions of $6 
million, excess tribal distributions of up to $6 million are allowed to be 
paid once the casino is open (under the proposed terms of the credit agreement 
any payments made to Kenwood will count against the excess tribal 
distribution). Any excess distributions to the Tribe beyond the $6 million 
will not be allowed until the manager loan is repaid in full. If the manager 
loan is repaid, excess tribal distributions can increase to $14 million. 
However, the manager loan cannot be repaid unless pro forma debt to EBITDAM is 
below 3x. Any excess distributions beyond $14 million must then be matched 
dollar for dollar to repay the term loan.

Under the credit agreement, there is 5% annual amortization (paid quarterly) 
and a 50% excess cash flow sweep. The 50% excess cash flow sweep stops if debt 
to EBITDAM is below 2x. Under our performance expectations, we have modeled 
any excess cash beyond $20 million going toward repayment of the term loan 
until debt to EBITDAM is below 3x. Given the incentive structure in the 
proposed capital structure (i.e., excess distributions beyond $6 million 
cannot be paid to the Tribe until the manager loan is repaid in full), we 
believe the Authority will likely shift its focus toward repaying the manager 
loan as soon as possible to increase excess tribal distributions.

The credit facility includes financial maintenance covenants, including a 
total leverage ratio, a fixed-charge coverage ratio, and maximum consolidated 
capital expenditures. Under our performance expectations, the Authority would 
be in violation of the initial 4.25x total leverage covenant after the first 
measurement date. However, we expect the Authority would likely be able to 
achieve an amendment to address a breach, given our expected leverage and 
liquidity levels. (Under the management teams' forecast, the Authority would 
generate sufficient EBITDAM to remain in compliance with the covenants)

Outlook
The stable rating outlook reflects our belief that, despite substantial debt 
funding, the property will ramp up steadily to generate sufficient cash to 
service the capital structure. We could raise our rating if the casino opens 
stronger than our current expectations, such that we expect EBITDAM coverage 
of total interest to remain above 2.5x. 

However, a more aggressive posture toward expansion spending or distributions 
than we have contemplated could preclude an upgrade. We could lower the rating 
if performance is materially worse than our expectations, or if construction 
delays and cost overruns signal a potential liquidity shortfall, such that we 
expect EBITDAM coverage of interest to track below 1.5x.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
 
Ratings List
New Rating

Graton Economic Development Authority
 Issuer Credit Rating                           B/Stable/--        
 $375M sr secd term loan due 2018               B
 $450M sr secd notes due 2019                   B
 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Our Standards:The Thomson Reuters Trust Principles.
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