Fitch Affirms Pinnacle Entertainment's IDR at 'B+'; Outlook Stable
NEW YORK -- July 15, 2014
Fitch Ratings has affirmed Pinnacle Entertainment, Inc.'s (PNK; Pinnacle)
Issuer Default Rating (IDR) at 'B+'. Fitch also affirmed all of Pinnacle's
issue ratings including the senior secured credit facility at 'BB+/RR1',
senior unsecured notes at 'BB-/RR3' and subordinated notes at 'B-/RR6'. The
Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of Pinnacle's IDR at 'B+' and the Stable Outlook reflect
Fitch's expectation that Pinnacle's leverage will decline to 6x or below over
the next two to three years even if moderate revenue declines continue.
Fitch's view is supported by Pinnacle's publicly stated goal of reducing debt,
with the company targeting leverage of 4x or below. The deleveraging will be
facilitated by Pinnacle's strong free cash flow (FCF) profile, which is
supported by limited capital spending requirements and substantial net
operating losses (NOLs) that will offset most if not all tax liability through
2017, the last year of Fitch's forecast.
With a 'B+' IDR there is less tolerance for company actions that could slow
down the debt reduction given the difficult operating environment across most
regional markets in which Pinnacle operates. Such actions might include
Pinnacle executing leveraging acquisitions and initiating dividends or share
repurchases. Pinnacle's operations will be challenged by the opening of the
Golden Nugget casino in Lake Charles, LA in late 2014. Fitch estimates that
Pinnacle's Lake Charles casino accounts for about 15% of the company's
Given the difficult operating backdrop, which Fitch expects will persist,
Fitch sees Pinnacle's debt/EBITDA ratio remaining elevated above 6x until
2016. This compares to Fitch's prior expectation at the time of the Ameristar
Casinos (Ameristar) acquisition that leverage would decline to below 6x within
a year of the acquisition, which closed in August 2013. The 6x threshold is
the maximum that Fitch believes appropriate for a 'B+' IDR given Pinnacle's
business risk profile. Fitch calculates for the LTM period ending March 31,
2014 pro forma debt/EBITDA for the sale of the Lumiere casino at 7.0x.
Fitch projects Pinnacle's debt/EBITDA at 6.4x for 2014 and 2015, 6.0x for 2016
and 5.7x for 2017. In Fitch's base case the debt reduction more than offsets
the decline in EBITDA except in 2015, when the EBITDA decline is accentuated
by the new competition in Lake Charles. Fitch believes Pinnacle's EBITDA after
corporate expense will be $626 million, $586 million, $579 million and $567
million for 2014, 2015, 2016 and 2017, respectively.
Fitch's base case assumes that Pinnacle's revenues decline by 3% in the second
quarter of 2014 on a same-store basis and then by 1% for the balance of the
projection horizon (excluding Lake Charles). Fitch forecasts Pinnacle's
property level margins to remain relatively stable in the low 30s as
Pinnacle's cost synergies should offset some of the flow-through from the
Fitch's base case assumes a 20% revenue decline in Lake Charles in 2015 with a
50% flow-through. This equates to roughly 30%-35% decline in EBITDA for the
property and about a 5% decline for the company. This is a larger decline
relative to Fitch's earlier forecast with the revision reflecting the softer
regional gaming trends, including in the Lake Charles market. Fitch assumes
that Belterra Park in Cincinnati will largely offset the declines at the
Belterra sister property in Indiana stemming from the new competition in Ohio.
Fitch's forecast assumes that Pinnacle applies all of its FCF to paying down
term loan B2 and projects FCF at about $105 million in 2014 (includes roughly
$135 million of capex for Belterra Park, including half of the $50 million
licensing fee paid in 2014) and approximately $250 million-$260 million in
discretionary FCF through 2017.
The FCF forecast for the outer years takes into account the following
--Property EBITDA of $645 million-$665 million;
--Corporate expense of $80 million;
--Interest expense of $210 million-$230 million;
--Cash tax expense at about zero ($553 million and $862 million in federal and
state NOLs, respectively, as of Dec. 31, 2013);
--Maintenance capex at $100 million.
Fitch's assumption that all FCF will be used to pay down debt reflects the
Pinnacle's consistently articulated goal of deleveraging, the lack of
attractive growth opportunities, and the company's covenants. Pinnacle's
credit agreement has a 50% excess cash flow sweep provision and limits
restricted payments to $100 million in aggregate. The revolver (about $600
million outstanding pro forma for the sale of Lumiere) has a leverage-based
pricing grid and leverage-based financial covenants that step down to below 6x
by mid-2016. The Ameristar 7.5% senior notes assumed by Pinnacle have
stringent restricted payment covenants but the notes are callable beginning
REGIONAL TRENDS TO REMAIN NEGATIVE
With no weather or calendar impediments, gaming revenues reported by the
gaming regulators for May remained negative on year-over-year basis across
regional markets on a same-store basis. Revenues were mostly down in the low
single-digit range with the exception of the few more fragile markets such as
Mississippi where declines approached double-digits. June has been similarly
weak for the states that have reported thus far. The common theme sounded by
regional casino operators is that the weakness stems largely from the
lower-tier customers, often described as those with a theoretical loss of $100
or less per visit.
Fitch attributes the weakness in regional gaming to near-term and long-term
headwinds. Near-term, the end of the federal unemployment benefits at year-end
2013 and the individual health insurance sign-ups related to the
implementation of the Affordable Care Act (ACA) are having an impact.
Annualized unemployment benefits are down $31 billion in the 1Q'14 and the
Congressional Budget Office expects six million to be enrolled in an
ACA-compliant plan in 2014 with about five million getting some form of a
subsidy. Longer-term headwinds include stagnant wages among the 99%;
reprioritization of discretionary income; lower interest rates (which affects
investment income) and proliferation of lower cost, more convenient gaming
(e.g. video gaming terminals at bars, casino-themed social games, and
On the bright side, the EBITDA flow-through from the revenue declines has been
relatively modest for most operators in 1Q'14 at around 40% as operators
continue to cut costs. The low flow-through partially reflects the regional
markets' high tax rates (Mississippi is a notable exception) and admission
fees (common in the Midwest). Fitch notes that the flow-through may increase
closer to 50% as the cost savings begin to anniversary.
POTENTIAL FOR A REIT SPIN-OFF
Since Penn National Gaming (Penn) spun off its assets into a REIT (Gaming &
Leisure Properties, Inc.; GLPI) in late 2013 there has been market speculation
whether any of the other regional operators will consider a REIT spin-off.
GLPI has been well-received by the equity markets with the company trading at
about 14x-15x EV/EBITDA relative to the 7x-8x regional multiples. PNK has been
routinely mentioned as the most likely candidate to do a spin-off given its
better-than-industry-standard balance sheet, quality of assets, size and
diversification. On April 16, 2014, Pinnacle received a letter from Orange
Capital, which owns 4.5% of the company's stock, making a case for a REIT
spin-off. The company responded by saying that the management and the board
'regularly review its strategic priorities and opportunities, and assess a
variety of value creating options.'
Fitch views the probability of Pinnacle executing a REIT spin-off as low in
the near term and somewhere in the 50/50 range longer term (past 2017). Should
Pinnacle pursue a REIT spin-off, Fitch may consider it a credit negative
depending on how the transaction is financed. In the case of Penn, Fitch
viewed the transaction negatively since the lease-adjusted leverage increased
following the transaction.
Fitch believes Pinnacle may consider the spin-off once leverage improves, most
of its bonds become callable, and its NOLs are close to being depleted. These
conditions will not likely be met until 2017 at the earliest. Also, according
to GLPI and Penn, a REIT spin-off is very complex and takes a long-time to
execute. Nevertheless, should GLPI's multiples hold up, Fitch believes a
spin-off would be tempting for Pinnacle, especially given the lackluster
organic growth prospects.
The 'RR1' Recovery Rating (RR) on Pinnacle's senior secured credit facility
results in a three-notch uplift from the IDR and takes into account Fitch's
expectation of full recovery in an event of default. The 'RR3' on the senior
unsecured notes (one-notch uplift from the IDR) reflects Fitch's expectations
of better-than-average recovery for the senior notes in an event of default.
The senior notes benefit from a quick paydown of Pinnacle's term loan and
tight lien covenants in Pinnacle's senior notes indentures.
Pinnacle repaid $660 million of term loans since the credit facility closed in
August 2013 using proceeds from asset sales and FCF. The paydowns were
partially offset by draws on its revolver to fund Belterra Park. Pinnacle is
restricted to 3.5x capacity on its credit facility per the senior notes'
indentures. The notes mature in 2021 and are not callable until August 2016
(April 2015 for the 7.5% notes).
The 'RR6' on the subordinate notes reflects Fitch's expectation of minimal
recovery in an event of a default and results in a two-notch negative
differentiation from the IDR.
RATING SENSITIVITIES (Fitch forecasts in parentheses)
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
-- Fitch having less confidence that PNK's debt/EBITDA ratio will approach 6x
by 2016 (FY16: 6.0x and FY17: 5.7x);
-- Same-store revenue declines significantly exceed Fitch's 1% per year
projection for an extended period of time;
-- Discretionary FCF declining below $250 million, or $200 million once the
NOLs are fully utilized, for an extended period of time (FY15: $256 million,
FY16: $259 million);
-- The company's adopts a more aggressive financial policy and starts to
de-emphasize debt reduction;
-- PNK pursuing a REIT spin-off that would result in the rent adjusted
leverage to increase.
Positive: No positive rating action is expected over the next 24 months given
the company's high leverage. However, positive rating action may result from:
-- Debt/EBITDA declining below 5x;
-- Revenue growth stabilizing at or close to 0%;
-- Discretionary FCF exceeding $300 million, or $250 million once the NOLs are
fully utilized, for an extended period of time (FY15: $256 million, FY16: $259
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', (May 2014);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers', (November 2013);
--'U.S. Gaming Recovery Models - Fourth-Quarter 2013', (May 2014);
--'2014 Outlook: U.S. Gaming (Deleveraging Potential)', (December 2013);
--'Pinnacle Entertainment, Inc. -- Ameristar Acquisition Financing
Considerations', (July 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
U.S. Gaming Recovery Models ￢ﾀﾔ Fourth-Quarter 2013
2014 Outlook: U.S. Gaming (Deleveraging Potential)
Pinnacle Entertainment, Inc. -- Ameristar Acquisition Financing Considerations
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Alex Bumazhny, CFA, +1-212-908-9179
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
Michael Paladino, CFA, +1-212-908-9113
Sharon Bonelli, +1-212-908-0581
Brian Bertsch, +1-212-908-0549
Media Relations, New York
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