NEW YORK--(BUSINESS WIRE)--Today's announcement that Gaming and Leisure Properties LLC's (GLPI) offered to purchase and lease back Pinnacle Entertainment Inc.'s (Pinnacle) assets provides Pinnacle with another path to realize value from its assets, according to Fitch Ratings.
In exchange for Pinnacle's assets, GLPI has offered Pinnacle shares and the assumption of some of its debt. Previously Pinnacle announced that it was pursuing a spin-off of its assets into a separate REIT and would lease these assets back from the REIT.
The net effect on Pinnacle's credit in either scenario would be similar with its lease adjusted leverage being in the mid-to-high 6x range under either scenario. The GLPI scenario would result in the adjusted leverage being closer to the lower end of that range. The adjusted leverage under both scenarios is higher relative to Fitch's forecast of adjusted leverage declining to low 6x range by year-end 2015 if assets were to stay in place.
Fitch also estimates that under either asset transfer scenario Pinnacle's run-rate FCF would be around 5% of revenues, which provides only a modest buffer against potential operating declines. Under a status quo scenario run-rate FCF will be closer to 10% of revenues.
Fitch revised Pinnacle's Outlook to Negative from Stable on Nov. 7, 2014 with the revision taking into account the announced REIT spin-off as well as the weak operating fundamentals for regional gaming. In Fitch's view, a long-term lease payment to either a new REIT or to GLPI as well as an obligation to pay maintenance capex would increase Pinnacle's fixed cost structure. This is especially problematic given Fitch's negative long-term view on regional gaming.
Pinnacle's debt has asset sale covenants, which will likely require the company to refinance its debt as part of any asset sale or spin-off.
For more on Fitch's views on regional gaming and gaming REITS see 'A Choppy Year for Gaming (Fitch's Views on Gaming in 2015)' dated Feb. 26, 2015. Fitch also discussed regional gaming secular trends at greater length in 'U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)', dated July 21, 2014.
Fitch currently rates Pinnacle as follows:
--Issuer Default Rating 'B+'; Outlook Negative;
--Senior secured credit facility 'BB+/RR1';
--Senior unsecured notes 'BB-/RR3';
--Subordinated notes 'B-/RR6'.
Additional information is available at 'www.fitchratings.com'.
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