NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'B+/RR2' rating to Marina District Finance Company's (Borgata) proposed $380 million senior secured term loan B. Fitch also affirms Borgata's Issuer Default Rating (IDR) at 'B-' and revises the Rating Outlook to Positive from Stable. All other ratings are affirmed. (A full list of rating actions follows at the end of this release).
The proceeds from the new term loan issuance will be used to redeem $358 million outstanding in Borgata's 9.5% senior secured notes due 2015 and pay related transaction costs. The term loan will be coterminous with the remaining senior secured notes, which mature August 2018. The term loan will be pari passu to the notes but junior in payment priority to Borgata's $60 million revolver.
The term loan is expected to have a 50% excess cash flow sweep and will require Borgata to use any settlement proceeds from the tax appeal to repay the term loan (repayment provisions will be subject to Borgata meeting certain leverage thresholds). The term loan is not expected to have financial covenants but will benefit from the revolver's minimum EBITDA covenant now set at $110 million. The revolver matures in February 2018.
Fitch forecasts annual interest savings from the refinancing in the range of $10 million - $15 million, although for every 25 basis points rise in the short-term interest rate, annual interest cost increases by about $1 million. This sensitivity to short-term rates may offset some of the interest savings over-time. Fitch believes that the interest rate risk is largely offset by the excess cash sweep provision in the loan, which was absent for the notes being refinanced.
RATING DRIVERS
The revision of the Outlook to Positive reflects the interest cost savings and the improved maturity profile that will result from the refinancing of the 9.5% notes; Borgata's improved performance in the third-quarter 2013; and the more benign competitive landscape with New York gaming expansion largely being limited to upstate New York and Long Island and Wynn Resorts pulling its bid for a Philadelphia license. Fitch may upgrade Borgata's IDR to 'B' if the improvement in operating trends is sustained over the next two to four quarters and if leverage declines to about 6x. The court's decision reducing Borgata's assessed value being upheld would also be viewed positively when considering an upgrade.
Fitch will also monitor developments surrounding online gaming which is expected to be launched in New Jersey later this month. Although Fitch believes that online gaming will be generally accretive to the Atlantic City based casino operators, questions remain as to how the profits will be shared amongst various participants (e.g. JV sponsors, technology and content suppliers, etc.) and to what extent, if any, online gaming will cannibalize land-based operations.
The 'B-' IDR continues to take into account Borgata's leading position in the Atlantic City market and healthy FCF cushion, which will expand with this refinancing.
Although the Atlantic City market continues to come under pressure from regional competition and lackluster economy, Borgata's performance has been stabilizing. The property's state reported gross revenues increased on a year-over-year basis in the past four out of six months ending October and EBITDA increased in the third-quarter 2013 for the first time since the first-quarter 2012. Borgata has maintained greater than 20% market share in Atlantic City in spite of Revel entering the market in early 2012 and has performed better relative to its peers with the LTM gross revenues being down 0.5% through October relative to the market's 6.8% decline (includes the effect from Sandy).
The Atlantic City market still faces competitive headwinds, but there were no new major openings in the surrounding jurisdictions since late 2011 when Resorts World opened in Queens, NY. Fitch does not anticipate any new openings of full scale casinos until late 2016/early 2017 at the earliest when there could be one additional casino opening in Philadelphia and two casinos opening in the Catskills. The New York expansion bill also permits two video lottery terminal (VLT) facilities in Long Island that can potentially open before that.
The potential for a gaming expansion in New York was a major overhang for the Atlantic City market since there was potential for full scale casinos in New York's five boroughs. The bill that was approved by the voters this month permits full scale casinos in upstate New York only. The law permits four casinos initially and three more after seven years. Fitch expects the effect on Borgata from these casinos plus the Long Island VLTs to be manageable.
Fitch calculates Borgata's run rate FCF at approximately $30 million - $45 million. The FCF range incorporates run-rate EBITDA of $125 million, which takes into account management's guidance for the fourth quarter 2013. The EBITDA range does not incorporate the potential for reduced property tax since the court's ruling is being appealed. If the ruling holds, annual savings could be approximately $30 million per year based on the ruling's assessed value and the prevailing property tax rates.
Fitch's estimated FCF run-rate range also assumes $60 million - $70 million in interest expense and $20 million - $25 million of maintenance capital expenditures. Fitch believes that the launch of online gaming, which can occur later this year, will be accretive to the FCF profile although likely not immediately given the heavy amount of upfront investment needed.
Rating Relationship with Boyd and MGM
Fitch does not link the IDRs of Borgata and Boyd Gaming (Boyd; 'B' IDR) although Fitch believes that there is a moderate rating linkage due to Borgata's online gaming license in the state of New Jersey. A strong linkage is precluded at this point given that Boyd only owns a 50% stake in Borgata and the profitability of online gaming is largely untested under New Jersey's legal framework. New Jersey's online gaming plans to go live on Nov. 26, 2013.
Before online gaming was passed in New Jersey, Fitch categorized the rating linkage between Boyd and Borgata as weak. Absent online gaming, Borgata has little strategic value for Boyd as Borgata is not included in Boyd's loyalty program and operates in a difficult operating environment. To the extent Boyd remains a stronger credit and online gaming remains promising, Borgata credit will benefit from the 50% ownership by Boyd. The other JV owner is MGM Resorts International (IDR 'B' with a Positive Outlook). In 2010, MGM agreed to divest of its share in Borgata due to the state regulators' concerns over MGM's affiliations in Macau. In February 2013, MGM requested that the New Jersey regulators revisit its ability to retain its 50% stake in Borgata.
Liquidity and Credit Metrics
Borgata's liquidity pro forma for the refinancing is adequate with $40.5 million available on its $60 million revolver, no maturities until 2018 pro forma for the refinancing and FCF in the range of $30 million - $45 million. For the LTM period ending Sept. 30, 2013, gross leverage and interest coverage are 6.6x and 1.4x, respectively. Pro forma for the refinancing and adjusting for Sandy (negatively impacted fourth quarter 2012 by $11 million) gross leverage is roughly 6.2x and 2.0x, respectively. The credit profile can improve further if Borgata receives $57 million in refunds related to 2009 and 2010 tax years the company believes it is owed based on the recent court ruling. Borgata will also seek refunds for tax years 2011-2013. Property tax refunds must be used to repay the term loan as long as leverage is 4.5x or greater.
Transaction Ratings and Recovery
The 'RR2' Recovery Rating (RR) on the term loan and the 9.875% notes corresponds to an estimated recovery in the 71%-90% range in an event of a default. The refinancing initially increases senior secured debt by $28 million; however, Fitch views the presence of pre-payable debt as a positive for the recovery prospects. Fitch estimates full recovery for Borgata's $60 million revolver, which has priority over the term loan and the secured notes.
In the recovery analysis Fitch stresses Borgata's LTM EBITDA by 5% and applies a 7x EV/EBITDA multiple. A low EBITDA stress reflects the effect of Sandy on the fourth-quarter 2012 results. Fitch also assumes full draw on the revolver and 10% for administrative claims.
RATING SENSITIVITIES
These factors, individually or combined, may lead to an upgrade of the IDR to 'B':
--The improvement in operating trends is sustained over the next two-four quarters;
--The court's decision reducing Borgata's assessed value is upheld; and/or
--Leverage declines to roughly 6x or below.
Long-term the IDR is largely constrained within the mid-'B' range given the heavy exposure to the Atlantic City market. With online gaming being legalized, Fitch believes that there is a higher likelihood that Boyd and/or MGM will support Borgata. However, Fitch does not expect material rating impact from the increased strategic linkage given that Boyd's and MGM's IDRs are in the 'B' category.
With maturities pushed out to 2018 and improving FCF profile, Borgata now has ample cushion at the 'B-' IDR.
The IDR could be pressured, however, if citywide negative trends persist and Borgata's operations suffer as result. Fitch would consider revising the Outlook to Negative if EBITDA starts to approach $100 million.
Fitch affirms the following ratings:
Marina District Finance Company, Inc. (Borgata)
--Issuer Default Rating (IDR) at 'B-'; Outlook to Positive;
--Senior secured revolving credit facility at 'BB-/RR1';
--Senior secured first-lien notes at 'B+/RR2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Revises Boyd's Outlook to Stable & Rates Credit Facility 'BB/RR1'; Affirms Related Entities' (Aug. 6, 2013);
--'U.S. Gaming Recovery Models --Second-Quarter 2013' (Aug. 21, 2013);
--'2013 Outlook: U.S. Gaming - Return Generation in Full Swing' (Dec. 17, 2012);
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
U.S. Gaming Recovery Models - Second-Quarter 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716935
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696684
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808410
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