NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Pinnacle Entertainment, Inc.'s (Pinnacle) $800 million in new senior unsecured notes 'BB-/RR3' and its $2.6 billion senior secured credit facility 'BB+/RR1'.
On July 16, 2013, Fitch upgraded Pinnacle's Issuer Default Ratings (IDR) to 'B+' from 'B' and indicated its expected ratings for Pinnacle's financing of the Ameristar Casinos, Inc. (Ameristar) acquisition. Fitch also released a report yesterday discussing its views regarding major considerations surrounding the acquisition financing.
The ratings noted above are consistent with Fitch's expected ratings assigned on July 16. A full list of rating actions is provided at the end of this release. The July 29 report and July 16 rating comment can be accessed at 'www.fitchratings.com'.
KEY RATING DRIVERS
The only change in the acquisition financing terms relative to Fitch's expectations since the July 16 rating actions is the insertion of a three-year tranche into the term loans. The $2.6 billion credit facility now consists of a $1 billion revolver due 2018 and $1.6 billion in term loans (TLs), which includes a $500 million three-year tranche due 2016 and a $1.1 billion seven-year tranche due 2020.
Fitch views this structural change as credit neutral with respect to Pinnacle's 'B+' IDR. The new tranche becomes Pinnacle's earliest debt maturity in the pro forma capital structure. However, its maturity profile remains attractive, and improved pricing will reduce pro forma interest costs.
Fitch views the pending sale of the Lake Charles project and the successful covenant amendment/waiver consent from Ameristar noteholders favorably. On a stand-alone basis, Pinnacle was on track for an upgrade to 'B+' earlier this year, but the upgrade was delayed due to the additional leverage expected from the Ameristar acquisition. The timing of Fitch's July 16 upgrade was supported by the lower pro forma leverage from the asset sales and the combined restricted groups.
The sale of the Lake Charles project also reduces Pinnacle's exposure to gaming legalization in Texas, although we do not think this is a near-term risk. Fitch believes Landry's, Inc. (Landry's), based in Houston, TX, being the buyer of the Lake Charles project is a positive consideration with respect to the Texas legalization risk. Landry's operates more than 100 restaurants in South Texas and would have an incentive to oppose gaming legalization in the state after acquiring the Lake Charles project.
Improved Business Risk and FCF Profile
Pinnacle's business risk profile improves as a result of the Ameristar acquisition. Specifically, the merged company will be significantly more diversified with casino operations in 12 distinct markets and seven jurisdictions. No market will account for more than 21% of the company's pro forma property EBITDA. This compares to Pinnacle's current concentrations in Lake Charles, LA and St. Louis markets which account for 37% and 32% of the total EBITDA, respectively.
Pinnacle's FCF profile also improves materially as a result of the Ameristar acquisition and the wind-down of Pinnacle's development pipeline, which will be accelerated with the sale of Ameristar's Lake Charles project. Fitch forecasts run-rate FCF pro forma for the acquisition at around $300 million or $240 million once Pinnacle exhausts its net operating losses (NOLs) and becomes a federal tax payer around 2016.
Greater Financial Risk
The improvement in the operating profile along with a healthy pro forma FCF profile largely offset Fitch's concern over the expected increase in Pinnacle's leverage pro forma for the acquisition financing. Fitch calculates Pinnacle's leverage pro forma for the acquisition roughly in the 6.35x-6.5x range, up from 5.1x as of June 30, 2013. The pro forma range takes into account conservative assumptions regarding the sale of Lumiere, acquisition synergies and a full year of L'Auberge Baton Rouge operations.
The pro forma leverage range is slightly high relative to Pinnacle's 'B+' IDR; however, Fitch expects Pinnacle to use its FCF to paydown debt and leverage to decline close to or below 6.0x by the end of 2014. Fitch forecasts leverage to decline to the mid-5x range by year-end 2015 and the low-5x range by year-end 2016. Pinnacle's publicly stated target leverage range has been 3.5x-5.0x. More recently the company has expressed a longer-term goal of getting to below 4x.
Pinnacle will start generating substantial FCF as the company's development pipeline begins to wind-down. With the Lake Charles development being sold, Pinnacle's last project will be the VLT facility at River Downs, which will be complete by first-half 2014. Fitch expects the new credit facility to have a 50% excess cash flow sweep provision and the company has publicly stated its intention to use cash flow to deleverage its balance sheet.
Fitch built a fair degree of conservatism into its EBITDA and FCF projections to account for variability related to general weakness in the regional gaming markets as well as new competition in Lake Charles, Bossier City and southern Indiana markets. Fitch's base case projection estimates that the combined company's same-store EBITDA will grow at a compounded growth rate of negative 2.9% from 2013 to 2016.
Specifically, Fitch makes the following assumptions:
--Belterra's EBITDA will decline roughly 30% cumulatively through mid-2015 due to cannibalization from Horseshoe Cincinnati and River Downs;
--L'Auberge Lake Charles' EBITDA will decline 25% in 2015;
--Boomtown Bossier City's EBITDA will decline about 17% cumulatively between mid-2013 and mid-2014.
These declines will be partially offset by the opening of River Downs in first-half 2014, further ramp up at Baton Rouge and Fitch's expectation of low-single digit EBITDA growth at the properties not being impacted by new competition.
Fitch's base case EBITDA forecast for River Downs is $35 million relative to the Scioto Downs in Columbus, OH, which is generating approximately $45 million - $50 million in EBITDA but operates in a less saturated market.
Pinnacle will have a healthy pro forma liquidity profile. Fitch estimates that Pinnacle will have approximately $580 million available on its $1 billion revolver after accounting for about $10 million in outstanding letters of credit and $410 million drawn at closing. The $410 million draw estimate takes into account debt outstanding at Pinnacle and Ameristar as of June 30, 2013; $1.15 billion in acquisition consideration and transaction fee payments; and plans to issue a $1.6 billion term loan and $800 million in new unsecured notes ($446 million used to refinance existing notes).
After the acquisition closes, Pinnacle may draw on its revolver to fund Ameristar's Lake Charles project prior to the project's sale closing. The revolver might also be used for the completion of River City phase II and the construction of River Downs, although the combined company's FCF should be able to cover the associated costs.
Pro forma for the refinancing of Pinnacle's 8.625% senior notes maturing 2017, the earliest maturity will be 2016 when the new TL tranche becomes due. The discretionary FCF is expected to remain well above $200 million. The last project in Pinnacle's development pipeline is River Downs, which will be complete in the second quarter of 2014. Pinnacle has another $186 million to spend on River Downs as of June 30, 2013.
Fitch has assigned the following ratings
--Pinnacle's new $2.6 billion senior credit facility 'BB+/RR1';
--Pinnacle's proposed $800 million senior unsecured notes 'BB-/RR3';
--Ameristar's existing 7.5% senior unsecured notes being assumed by Pinnacle once the acquisition closes 'BB-/RR3'.
Fitch's existing ratings for Pinnacle are as follows:
--Issuer Default Rating 'B+';
--Pre-acquisition senior secured credit facility 'BB+/RR1';
--Legacy senior unsecured notes 'BB-/RR3';
--Legacy subordinated unsecured notes 'B-/RR6'.
The Rating Outlook is Stable.
The 'RR1' on the senior secured credit facility, 'RR3' on the unsecured notes, and 'RR6' on the subordinated notes correspond to ranges for Fitch's recovery expectations in an event of default for the respective tranches of 91%-100%, 51%-70%, and 0%-10%.
Fitch still expects full recovery for the secured lenders, but with less cushion relative to the pre-acquisition capital structure. Fitch calculates the recovery for the senior unsecured noteholders at the low end of the 51%-70% range. However, Fitch expects the senior unsecured tranche recovery prospects to improve relatively quickly as Pinnacle uses FCF to pay down its secured debt. Pinnacle stated that it intends to use FCF to pay down debt, and Fitch expects that the new credit facility will have a 50% excess cash flow sweep provision.
Aside from the cash flow sweep, Fitch expects the new credit facility to have typical asset sale provisions, which would require Pinnacle to either pay down its credit facility or reinvest the proceeds. This provision is also included in the 7.5% Ameristar senior notes being assumed by Pinnacle. Ameristar notes also have a 3.5x EBITDA limitation on secured debt issuance. Pinnacle's legacy subordinated note covenants pertaining to senior debt issuance will be made obsolete with the planned transactions since there are carveouts for acquisition-related financings.
At the current 'B+' IDR and with leverage initially above 6x, Fitch expects no further positive rating actions for Pinnacle in the near term. However, with the increase in size and diversification that will result from the Ameristar acquisition, Pinnacle's operating profile can support a 'BB' category IDR at or below 5x leverage. Fitch expects Pinnacle to reach or get close to 5x leverage within a two- to three-year timeframe.
The 'B+' IDR takes into account Fitch's expectation that Pinnacle will be able to get to or below 6x leverage quickly or approximately within one year of the acquisition closing. Leverage persisting above 6.0x for a longer period of time due to operating deterioration, additional debt incurrence to acquire assets or an undertaking a major new development may put pressure on the 'B+' IDR, likely in the form an Outlook revision to Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (November 2012);
--'Pinnacle Entertainment, Inc.: Ameristar Acquisition Financing Considerations' (July 2013);
--'Fitch Upgrades Pinnacle's IDR to 'B+'; Expects to Rate Credit Facility 'BB+/RR1'; Sr Notes 'BB-/RR3'' (July 2013);
--'Eye in the Sky Series: Indiana -- Gaming Jurisdiction Surveillance Monitor' (March 2013);
--'Eye in the Sky Series: Louisiana -- Gaming Jurisdiction Surveillance Monitor' (March 2013);
--'Eye in the Sky Series: Missouri -- Gaming Jurisdiction Surveillance Monitor' (March 2013);
--'Eye in the Sky Series: Ohio -- Gaming Jurisdiction Surveillance Monitor' (March 2013);
--'Eye in the Sky Series: Texas -- Gaming Jurisdiction Surveillance Monitor' (March 2013).
--'Fitch Affirms Pinnacle's IDR at 'B' on Ameristar Acquisition; Maintains Positive Outlook' (December 2012);
--'2013 Outlook: U.S. Gaming (Return Generation in Full Swing)' (December 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Pinnacle Entertainment, Inc. -- Ameristar Acquisition Financing Considerations
Eye in the Sky Series: Indiana ￢ﾀﾔ Gaming Jurisdiction Surveillance Monitor
Eye in the Sky Series: Louisiana ￢ﾀﾔ Gaming Jurisdiction Surveillance Monitor
Eye in the Sky Series: Missouri ￢ﾀﾔ Gaming Jurisdiction Surveillance Monitor
Eye in the Sky Series: Ohio ￢ﾀﾔ Gaming Jurisdiction Surveillance Monitor
Eye in the Sky Series: Texas ￢ﾀﾔ Gaming Jurisdiction Surveillance Monitor
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)