Fitch Rates Pinnacle's $800MM Sr. Notes 'BB-/RR3' & $2.6B Credit Facility
NEW YORK -- July 30, 2013
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
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
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
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
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
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
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'
--'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'
--'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'
--'Eye in the Sky Series: Texas -- Gaming Jurisdiction Surveillance Monitor'
--'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
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)
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Alex Bumazhny, CFA, +1-212-908-9179
Fitch Ratings, Inc.
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