River Cree Enterprises LP, an aboriginal casino operator in Canada’s booming west, is preparing to become the country’s first native-owned company to issue public debt.
The company plans to raise C$200 million ($189 million) in seven-year bonds to buy out a U.S. gaming company’s minority stake in the River Cree Resort and Casino, Alberta’s largest casino and the only one near the capital city of Edmonton that allows gamblers to smoke.
The casino is located on the Enoch Cree Nation’s tribal land outside of Edmonton, making it exempt from smoking bans that affect its competitors. That’s attracted smokers to the River Cree casino, driving more traffic to its slot machines and poker tables.
“This is a good asset,” Anil Passi, an analyst with Toronto-based DBRS Ltd., a credit-rating company, said in a phone interview. “There’s a high correlation between smokers and gamblers. The data speaks for itself: The slot machines in smoking areas generate almost four times the revenue of machines in non-smoking areas.”
The bond sale, to be pitched to investors next week, comes as casino debt has outperformed other junk bonds. Global gaming industry bonds have returned 6.6 percent this year, compared with a 1.4 percent return for all bonds in the Merrill Lynch Global Corporate & High Yield Index, according to data compiled by Bloomberg.
Elsewhere in credit markets, Quebec bonds traded at the widest in a month relative to neighboring Ontario after Finance Minister Nicolas Marceau said yesterday the province had abandoned its goal of reaching a balanced budget in the fiscal year that began in April. The 10-year yield gap between the two provinces widened to 15 basis points, the most since Oct. 25.
Canada’s second-most populous province will record a C$2.5 billion deficit this year and a C$1.75 billion shortfall next year before returning to balance in 2015-16, Marceau said.
The premium investors demand for provincial debt compared to federal benchmarks narrowed one basis point to 69 basis points from the previous day, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields decreased to 2.95 percent from 2.97 percent.
The extra yield investors demand to own the debt of investment-grade corporations rather than of the federal government was unchanged at 119 basis points, or 1.19 percentage points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields fell one basis point to 3.07 percent.
Corporate debt has returned 1.2 percent this year, compared with losses of 1.9 percent for provincial debt and 1.7 percent for federal-government securities, Merrill Lynch indexes show.
Casinos proliferate under Alberta’s liberalized gaming laws and River Cree competes with seven others in the Edmonton area. They all benefit from proximity to a rising population and an economy strengthened by the province’s oil and gas industry.
An Alberta law enacted in 2008 banned all smoking in public areas and workplaces, but allowed an exemption for native reserves “respecting traditional aboriginal spiritual or cultural practices or ceremonies.”
Smoking and the quality of the relatively new casino built in 2006 have helped River Cree capture a 31 percent share of the slot-machine market in Edmonton. That’s led to an increase in adjusted revenue to almost C$118 million in 2012, up 23 percent over the previous five years, DBRS said in a report.
River Cree also benefits from access to the province’s First Nations Development Fund, which funnels a portion of the government’s take of gambling proceeds back to the company, which it uses to repay debt. DBRS estimated that extra revenue from the fund means that River Cree ultimately receives 45 percent of slot-machine revenue, compared with 15 percent for its non-native competitors.
Alberta is also one of the best places in Canada to operate a casino, as jobs in its oil and gas industry lead to a growing and increasingly wealthy population with discretionary income to gamble.
Over the past 10 years, Alberta’s population has increased by 27 percent to 4 million, the fastest growth rate of any Canadian province, according to Statistics Canada. It has the highest labor-force participation rate at 73 percent in October, and median income in Canada’s 2011 census was C$89,830, 24 percent above the national average. Gambling revenue in Alberta rose by ninefold between 1992 and 2009, to C$2.1 billion a year.
“You have above-average incomes, above-average propensity to game, above-average availability of gaming in Alberta relative to the rest of the country, and that actually does translate into an impressive industry construct,” Standard & Poor’s credit analyst Donald Marleau said in a phone interview from Toronto.
River Cree’s “competitive position is good, and that is what I think supports the single-B rating,” Marleau said.“The location is good, the fact that it actually is the most modern facility of its type in the region, and that fact that it allows smoking should not be underestimated in terms of its ability to drive traffic.”
Standard & Poor’s assigned a B- rating to the bonds and DBRS rates it B. Proceeds will be used to buy out minority partner Paragon Gaming Corp., a Las Vegas-based gaming company that also operates casinos in Vancouver and Whitecourt, Alberta.
River Cree is holding meetings with potential investors next week, including a luncheon in Toronto on Dec. 4. TD Securities, BMO Capital Markets and Scotiabank are marketing the debt sale, according to a person with direct knowledge of the sale who asked not to be identified because the information isn’t public.
River Cree’s is the second native public bond issue to be announced in Canada, after the native non-profit First Nations Finance Authority said earlier this month it’s preparing a C$100 million bond sale.