MOODY'S ASSIGNS B1 RATING TO RIVIERA HOLDINGS 1ST MORTGAGE NOTES AND PLACES ITS B1 RATED 11% 1ST MORTGAGE NOTES UNDER REVIEW FOR POSSIBLE UPGRADE
New York, 08-08-97 -- Moody's Investors Service assigned a B1 rating to the proposed $155 million first mortgage notes due 2004 of Riviera Holding Corporation and placed the existing $100 million 11% first mortgage notes due 2002 under review for upgrade based on the company's decision to implement a covenant defeasance option (permitted under the indenture) by irrevocably depositing in trust U.S. government securities in order to redeem the notes on June 1, 1998, which is when they are redeemable. The review will consider final completion of certain legal opinions and certified accountant's statements. In addition, Moody's changed the outlook to stable from negative.
The rating reflects the increase in leverage associated with the note offering; its dependence in the near-term on one hotel and casino for most of its cash flow; competitive disadvantages of the Las Vegas facility due to its age, location, and awkward design; and the capacity increases expected in the Las Vegas market over the next few years.
However, the rating and outlook change recognizes the company's increasing diversity; improved operating results; and potential for additional cash flows from its new Black Hawk, Colorado casino and Las Vegas expansion and development projects. In addition, the rating continues to reflect Riviera's focused marketing efforts and solid backlog of convention business.
Riviera intends to invest $15 million for a 100% interest in an unrestricted subsidiary (which would automatically become a restricted subsidiary in the event that it has a positive effect on the interest coverage ratio) formed to construct the Black Hawk casino. The facility will have 1,000 slot machines, a 500-space self-parking garage and a favorable location where it will be one of the first casinos travelers will encounter en route from Denver. Since parking and location are key drivers of the relatively mature Black Hawk/Central City market, Moody's believes that the casino has the potential to grab market share and generate steady cash flows. To build the casino, the company estimates that--in addition to the note proceeds--it will need $40 million that it intends to fund with bank construction financing, non-recourse to Riviera.
Nevertheless, the new casino will face competition from Isle of Capri Black Hawk, which has plans to open directly across from it by early 1999 (with 1,000 slot machines and a 500-space parking garage), and Jacobs Entertainment's new facility (with 800 slot machines, a 500-space parking garage and 50 hotel rooms), which is scheduled to open in mid-1998. Additionally, although the development of three announced/discussed projects ("Country World" casino, "Black Hawk Brewery" casino and Anchor Gaming's expansion) is uncertain, there is a risk that gaming demand is unable to meet the increase in gaming capacity. This is particularly the case if Colorado's legislature and voters pass a constitutional amendment raising or eliminating the state's $5 betting limit. Another longer term risk is the proposed two-lane access road connecting Central City to Interstate 70, which leads to and from Denver. If the road is constructed, Riviera's new casino would lose an important location advantage. In addition, Riviera's site has been designated a superfund site, and Riviera could potentially be liable to clean up any contamination. However, Moody's believes that potential clean-up costs would not be meaningful due to results from independent environmental studies performed at the company's request and because other similarly situated casino operators have only been required to make minor remediations.
At its core Las Vegas Strip casino, Riviera's cash flows should be enhanced by the $15 million expansion of its convention center from 100,000 square feet to 158,000 square feet, which is expected to be completed by late 1998, and from the $5 million addition of 10,000 square feet of gaming space. The company is also exploring longer-term opportunities to develop the Riviera, including building a retail/entertainment complex on the current casino's roof and/or contributing a five-acre parcel behind the Riviera to a time-share joint venture project.
The Riviera has implemented strategic changes over the past few years. It has amended its business strategy by tightening credit policies and reducing exposure to volatile gaming segments such as Baccarat and sports betting. In addition, Riviera now focuses on attracting the adult mid-level gaming customers instead of "high-rollers". In order to appeal to these customers, Riviera uses the database it has acquired over the years (over 30% of its business comes from repeat customers) and offers a variety of adults-only entertainment. At the same time, Riviera benefits from the relatively predictable conventioneer business due to its current 100,000 square feet of facilities as well as its proximity to the Las Vegas Convention Center. About 25% of the company's room nights over the next three years are already booked with conventioneers. However, Moody's believes that as the company expands its convention space it will be challenged to maintain its operating margins since conventioneers tend to spend less on gaming than repeat customers and other non-convention guests.
The new strategy helped increase EBITDA from $27.8 million in 1995 to $31.5 million in 1996. In addition, the company's liquidity increased in February 1997, when it obtained a $15 million five-year reducing revolving credit facility secured by newer slot and other equipment. However, following the notes offering, Riviera's debt (net of the old notes) will increase to a little more than 80% of its total book capitalization and about 70% of its market capitalization, and EBITDA to interest expense on a pro-forma basis will decrease to approximately 2 times.
So far, Riviera has avoided a marketing war--even after the launch of Stratosphere's marketing campaign featuring liberal table game rules and loose slot machines. In fact, Riviera's revenues and EBITDA climbed in the second half of 1996, while another northern Strip competitor, the Stardust, reported lower revenues and higher marketing costs as a result of increased competition.
Nevertheless, it may be difficult for Riviera to sustain its operating performance in the face of the increased capacity on the Strip. For the first six months of 1997, revenues and EBITDA were down slightly which we believe is due, in part, to a 4.5% increase in hotel rooms in late 1996, and the New York-New York hotel/casino which opened in January. With more resorts planned, Moody's expects the upcoming supply to outstrip demand, leading to increased promotional expenses in some areas and reduced average hotel room rates and occupancies. In this environment, the company will be hampered by the age of its facilities (even though all of Riviera's rooms are scheduled to be refurbished by the end of 1997) and its less-than-favorable northern Strip location.
In downtown Las Vegas, Riviera manages the Four Queens Hotel and Casino. As compensation, Riviera is entitled to receive 25% of the Four Queen's EBITDA over $4 million, with a minimum of $1 million in annual management fees (until June 2000). Riviera has also received warrants to acquire 20% of stock of the Four Queens, which has recently emerged from Chapter 11 bankruptcy proceedings. Given its attractive proximity to the Fremont Street Experience lights show, the Four Queens could improve its performance. But large management fees to Riviera are unlikely.
Of particular concern to Moody's is that none of the company's expansion and development projects currently contain fixed price contracts, thus exposing it to potential cost overruns. Although the new note indenture restricts the incurrence of additional indebtedness, the indenture contains carve-outs that allow for: (1) an additional $10 million to fund the Black Hawk project, (2) an increase in the revolving credit facility to $25 million, (3) the incurrence of $15 million in capital lease obligations, and (4) the incurrence of up to $10 million in subordinated debt. The notes will be secured by a first lien on all of its assets (except for certain gaming equipment). Any additional debt will be limited by a 2 times fixed charge coverage ratio.
Riviera Holdings Corporation, headquartered in Las Vegas, owns and operates the Riviera Hotel & Casino facility on the Las Vegas Strip. The facility has a 105,000-square foot casino with 1,300 slot machines and 55 gaming tables, and a 2,100-room hotel. The company also manages the Four Queens Hotel and Casino in downtown Las Vegas.
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