Fitch Downgrades Borgata IDR to 'B-' & Sr Notes to 'B+/RR2'; Affirms Boyd &
Peninsula IDRs at 'B'
NEW YORK -- November 12, 2012
Fitch Ratings downgrades Marina District Finance Company, Inc.'s (Borgata)
Issuer Default Rating (IDR) to 'B-' from 'B' and downgrades Borgata's senior
secured credit facility to 'BB-/RR1' from 'BB/RR1' and senior secured
first-lien notes to 'B+/RR2' from 'BB-/RR2'. Borgata's Rating Outlook is
revised to Stable from Negative.
Fitch also affirms Boyd Gaming Corp.'s (Boyd) and Peninsula Gaming LLC's
(Peninsula) IDRs at 'B'. Boyd's and Peninsula's issue specific ratings are
also affirmed and listed at the end of this release. The Rating Outlooks
remain Negative for Boyd and Stable for Peninsula.
The downgrade of Borgata's IDR reflects Fitch's heightened concern regarding
the competitive landscape facing the Atlantic City market. On Nov. 6th,
Maryland voters approved a ballot which reduces the state's gaming tax rate,
allows table games and authorizes an additional gaming license in Prince
George's County. Also, last week Wynn Resorts announced plans to apply for
Philadelphia's second license. Wynn's plans include a 300-room hotel and Fitch
expects the casino resort, should Wynn receive the license, to be more
comparable in terms of amenities and quality to Borgata than what is currently
offered in the Philadelphia area. (According to a Nov. 11th Philadelphia
Inquirer article, five other interested parties have submitted impact studies
to the City of Philadelphia before the last week's deadline, including Penn
These developments further exacerbate an already competitive landscape with
Resorts World in Queens, NY and Revel in Atlantic City having a noticeable
impact on Borgata's recent operating results. Also, the New York legislature
passed a measure in the 2012 session to allow seven full-scale casinos in the
state. The measure needs to be passed again in the 2013 session and be
approved by the voters that same year in a referendum. It is unknown where
these casinos will be located, but if the measure is made into law, it could
involve allowing table games at Empire Casino in Yonkers, NY and/or Resorts
The downgrade also takes into account the uncertainty related to Hurricane
Sandy. Fitch does not expect Sandy to have a long-term impact on Borgata, and
the property will be reimbursed at least partially for the lost business
through business interruption insurance ($1 million deductible). However, the
amount of any insurance reimbursement is inherently subjective and depends on
negotiations between Borgata and insurance carriers. Also, receipt of proceeds
could be subject to meaningful delays.
The five-day closure and the lost business during the immediate recovery could
pressure liquidity and/or Borgata's compliance with its $125 million minimum
EBITDA covenant, depending on the severity of the impact. Borgata's gaming
revenues declined by 20.9% in October, which captures four out of five days
the casino was closed due to Sandy.
The revision of the Outlook to Stable from Negative reflects Borgata's solid
free cash flow (FCF) profile, which Fitch expects to trough at $25 million -
$35 million once Revel fully ramps up. Borgata FCF is expected to get a boost
from reduced assessed value and property tax credits once the casino-resort
finalizes its assessed value settlement with Atlantic City. The city already
significantly reduced the assessed values of Trump Entertainment's and Caesars
Entertainment's properties and in certain instances agreed to grant tax
credits based on prior years.
Borgata's 'B-' IDR incorporates adequate cushion against further deterioration
in operating results and FCF stemming from accelerated ramp up of Revel and/or
other competitive pressures discussed above.
Borgata's leverage and interest coverage ratios were 5.7 times (x) and 1.6x,
respectively, through the latest 12 months (LTM) period ending Sept. 30, 2012.
Fitch expects Borgata's leverage to trend towards 7x in 2013 as EBITDA
approaches trough levels around mid-2013.
The affirmation of Boyd's IDR at 'B' reflects Boyd's healthy FCF profile and
the pending acquisition of Peninsula, which will be accretive to Boyd's credit
profile. These credit considerations largely offset Fitch's heightened concern
relating to Boyd's lackluster operating performance over the past two
quarters, particularly in the company's Las Vegas Locals segment. Boyd's
wholly owned EBITDA declined by approximately 10% and 7% in the second and
third quarters of 2012, respectively, when excluding IP (acquired in October
2011) and the one-time items in the third quarter ($6 million impact from
Hurricane Isaac and prior year's tax adjustment).
The Las Vegas Locals segment accounts for 37% of Boyd's wholly owned EBITDA
(less than a quarter once Peninsula is consolidated). The segment experienced
2% and 5% revenue declines and 11% and 21% EBITDA declines in the second and
third quarters of 2012, respectively. Fitch attributes the declines at least
partially to the competitive Las Vegas Locals environment as the state
reported revenues for the Locals market are slightly up year-to-date through
September. The company stated that it is addressing the declines by
accelerating slot machine replacements in the market, with increased emphasis
on lower denomination games.
Fitch believes the risk of Boyd breaching its Dec. 31, 2012 total leverage
covenant, when it is scheduled to step down to 7.25x (relative to 7.35x
reported for period ending Sept. 30, 2012) is manageable. Boyd's management
stated that they are in conversations with the bank group lenders to amend the
financial covenants, which Fitch believes is achievable given Boyd's healthy
Fitch calculates run-rate FCF for Boyd's main restricted group at around $95
million in the base case. This is enough to absorb Fitch's estimated $10
million - $20 million negative EBITDA impact from gaming expansions around the
Gulf Coast area (mainly Ameristar Lake Charles having an impact on Delta Downs
in late 2014 and early 2015) as well as roughly $30 million - $35 million in
increased interest expense once Boyd refinances its 2014 subordinated notes
and its credit facility, which matures December 2015.
Fitch's $95 million base case FCF forecast includes the following estimates:
--Restricted group property EBITDA of $365 million (same as LTM EBITDA);
--Peninsula management fees of $20 million;
--Cash-based corporate expense of $40 million;
--Echelon related expenses including Las Vegas Energy (LVE) settlement fees of
($17.7 million for LTM period);
--Interest expense of $170 million (run rate based on debt currently
--Maintenance capex of $60 million ($74 million for LTM period including $18.6
million spent at IP year-to-date in 2012).
Once the Peninsula transaction closes this quarter Boyd will also have access
to 50% of Peninsula's excess cash flows. Peninsula's credit agreement
restricted payment covenants permit Peninsula to pay dividends based on a
basket equal to $20 million plus excess cash flow not used for mandatory
prepayments of the term loan (50%) as long as leverage remains 0.5x below
maintenance covenant levels. Fitch estimates that excess cash flow will be
substantial at $60 million - $80 million on the conservative side. Peninsula
dividends can potentially help offset the amortization on Boyd's term loans
($42.5 million per year).
Boyd's Credit Metrics
Fitch calculates Boyd's wholly owned leverage and interest coverage for the
LTM period ending Sept. 30, 2012 at 8.8x and 1.9x, respectively. Fitch expects
the ratios to improve somewhat in 2013 as Boyd starts to collect management
fees from Peninsula, but leverage is expected to remain above 8x through
Fitch's base case forecast horizon, or above 7x if consolidated with
Peninsula. In calculating Boyd's ratios, Fitch subtracts from EBITDA Echelon
related expenses including site maintenance (captured in pre-opening expenses)
and settlement fees paid to Las Vegas Energy Partners (LVE; eliminated in
Boyd's statements). These expenses, which Fitch considers to be recurring,
equaled $17.7 million for the LTM period ending Sept. 30, 2012.
Peninsula Gaming Acquisition
The Peninsula acquisition is a positive for Boyd's credit profile and is a key
driver for affirming Boyd's IDR at 'B' despite the reported weakness in the
Las Vegas Locals segments.
In the near term, Boyd will benefit from management fees (estimated at around
$20 million per year) and possible dividends paid by Peninsula, which is
expected to generate healthy discretionary FCF. Longer term, Boyd plans to
consolidate Peninsula into its main restricted group, which should strengthen
the overall credit profile by reducing leverage (Peninsula will use at least
half of FCF to pay down its credit facility in the interim) and diversifying
Boyd's asset base away from the Las Vegas Locals market. Fitch does not expect
this to occur until mid-2014 as Peninsula's bonds are not callable until
Peninsula's 'B' IDR reflects its solid FCF profile, healthy liquidity profile
and an attractive asset portfolio, consisting of several locals oriented
properties that are largely insulated from competitive pressures. Fitch
estimates Peninsula's total leverage (including seller's note) and interest
coverage ratios pro forma for the merger closing at around 7.2x and 2.4x,
Relationship Between the IDRs
Fitch does not firmly link the IDRs of Boyd's, Borgata's (50% owned and
managed by Boyd) or Peninsula.
In the case of Boyd and Borgata, there is little strategic benefit for Boyd of
having Borgata in its asset portfolio since the property is not part of Boyd's
loyalty program and there is no cross marketing between Boyd's properties and
Borgata, which are geographically disparate. Therefore, Fitch believes there
is little incentive for Boyd, which is now a stronger credit (albeit just
marginally), to support Borgata if Borgata's credit profile deteriorated
further due to intensified competitive pressures.
The rating relationship is more ingrained between Boyd and Peninsula. The
ownership of Peninsula, with lower leverage and healthy FCF, boosts Boyd's
credit profile and once consolidated into Boyd's restricted group could be a
catalyst for affirming Boyd's IDR at 'B' with a Stable Outlook. Without the
Peninsula acquisition, Boyd's IDR would likely have been downgraded to 'B-' at
From Peninsula lenders' perspective, Fitch views Peninsula's credit profile
largely on a stand-alone basis since there is adequate covenant protection
against Boyd's ability to extract value out of the Peninsula's restricted
group and there are no cross-defaults between the restricted groups. If Boyd
decides to consolidate Peninsula into its restricted group, Peninsula's debt
will likely be refinanced with debt issued by Boyd, in which event Fitch will
withdraw ratings on Peninsula's debt.
What Could Trigger a Rating Action
A downgrade of Borgata's IDR to 'CCC' (next notch down from 'B-') is unlikely
unless there is notable risk of FCF turning negative or there is heightened
risk that Borgata will not be able to refinance its 2015 notes due to
difficult capital markets conditions and/or incremental competitive events
that are negative to Borgata's credit profile.
For Boyd, cushion for negative variance from Fitch's base case operating
assumptions is now minimal at 'B' IDR. Fitch's base case assumes stabilization
in the Las Vegas Locals market with revenue declines moderating in the last
quarter of 2012 and revenue growth turning positive the first half of 2013.
The base case assumes flat revenue growth across Boyd's other segments.
There is limited upside for Peninsula's IDR given the company's high leverage
relative to its operating profile. The probability of a downgrade is similarly
low given Peninsula's strong FCF profile, which Fitch thinks can absorb
considerable operating stress.
Today's rating actions are as follows:
Marina District Finance Company, Inc.'s (Borgata)
--IDR downgraded to 'B-' from 'B' (Rating Outlook revised to Stable from
--Senior secured revolving credit facility downgraded to 'BB-/RR1' from
--Senior secured first-lien notes downgraded to 'B+/RR2' from 'BB-/RR2'.
Boyd Gaming Corp.
--IDR affirmed at 'B' (Negative Rating Outlook);
--Senior secured credit facility affirmed at 'BB/RR1';
--Senior unsecured notes affirmed at 'CCC+/RR6';
--Senior subordinated notes affirmed at 'CCC/RR6'.
Peninsula Gaming LLC (and Peninsula Gaming Corp. as co-issuer)
--IDR affirmed at 'B' (Stable Rating Outlook);
--Senior secured credit facility affirmed at 'BB/RR1';
--Senior unsecured notes affirmed at 'CCC+/RR6'.
Additional information is available at 'www.fitchratings.com'. The ratings for
Boyd Gaming Corp and Peninsula Gaming LLC were unsolicited and have been
provided by Fitch as a service to investors. The ratings for Marina District
Finance Company, Inc. (Borgata) were solicited by, or on behalf of, the
issuer, and therefore, Fitch has been compensated for the provision of the
Applicable Criteria and Related Research:
--'Fitch Affirms Borgata's IDR at 'B' & Notes at 'BB-/RR2'; Outlook Negative'
(July 20, 2012);
--'Fitch Affirms Boyd's 'B' IDR Following Peninsula Announcement; Outlook
Remains Negative' (May 21, 2012);
--'Fitch Rates Peninsula's Proposed Credit Facility 'BB/RR1'; Senior Notes
'CCC/RR6'; IDR 'B'' (Aug. 2, 2012);
--'U.S. Gaming Recovery Models -- Second-Quarter 2012' (Sept. 12, 2012);
--'2012 Outlook: Gaming - Market Exposure the Differentiating Factor' (Dec.
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage (Aug. 8, 2012)';
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. Gaming Recovery Models -- Second Quarter 2012
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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