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08 Mar 1999
MOODY'S ASSIGNS B1 TO SENIOR NOTES OF WATERFORD GAMING, L.L.C.
Moody's Investors Service assigned a B1 rating to the proposed $110 million issue of senior notes, due 2009, of Waterford Gaming L.L.C., and its co-issuer and subsidiary, Waterford Gaming Finance Corp. (collectively "Waterford"). In addition, Moody's assigned a B1 senior implied rating. The rating outlook is stable.
The ratings reflect the company's reliance on a single source for its cash inflows, the Mohegan Tribal Gaming Authority ("MTGA"), operator of the Mohegan Sun casino in Connecticut; thin anticipated interest coverage from cash flow prior to the opening of the Mohegan Sun's expansion; high recovery risks under a default scenario; risk of principal repayment due to the limited life of the company's primary asset; and longer-term competitive threats to the Mohegan Sun. In addition, Waterford is not a bankruptcy remote entity and could potentially be drawn into a bankruptcy or similar event by its parent, Waterford Group, L.L.C.
However, the ratings also reflect the strong operating results of MTGA (rated Ba1 senior implied) and the likelihood that its operating results and Waterford's will significantly improve following its planned expansion; the cash reserves that will be held in escrow following the offering; and restrictive limitations of the indenture that prohibit other business activities, the incurrence of additional debt, and limit restricted payments.
Proceeds from the offering will primarily be used to repurchase Waterford's existing notes for approximately $73 million, distribute $23 million to the Waterford Group, and fund an interest reserve account equal to a one year payment. The Waterford Group will not guarantee the notes.
Waterford derives substantially all of it revenues from its partnership interest in Trading Cove Associates, who is currently the manager of the Mohegan Sun, and its ownership interest in the MTGA's junior subordinated notes. Effective January 1, 2000, Trading Cove will no longer manage the Mohegan Sun and will exchange its profit-based monthly management fee for a 15 year revenue-based quarterly relinquishment fee equal to 5% of the gross-revenues of the Mohegan Sun.
Over the next several years, interest obligations under the notes should be sufficiently protected due to Waterford's interest reserve account. Prior to the planned 2002 opening of the Mohegan Sun's expansion, interest coverage on the notes from Waterford's revenues should be thin. In addition, during the expansion, the potential for construction delays and cost overruns exists, which could negatively impact Waterford's operating results. However, in addition to a reserve equal to a full year payment established with proceeds from the offering, $15 million is expected to be contributed on January 1, 2000. At this time, the MTGA plans to redeem all of Waterford's junior subordinated notes through a covenant defeasance, resulting in net proceeds of approximately $15 million to Waterford after a $35 million distribution to the Waterford Group. The indenture requires that the $15 million be placed into a reserve account to cover interest expense on the notes if necessary. Although the indenture permits Waterford to upstream this money to Waterford Group, it can only do so following the completion of the expansion and only when Waterford reaches an interest coverage ratio of 2.0 times or better for two consecutive quarters.
Since Waterford is a half partner in Trading Cove, Waterford does not have the authority to cause Trading Cove to make any distributions to Waterford. Consequently, should Waterford and its partner Sun Cove encounter unforeseen disputes, Sun Cove could prevent or delay distributions of cash to Waterford, jeopardizing the debt service payments of the notes.
In addition to the restrictive covenant that prohibits Waterford from conducting business activities other than those pertaining to its interests in Trading Cove and the Mohegan Sun, noteholders benefit from an agreement that limits Trading Cove's operating expenses to $2.0 million per year after January 1, 2000. This should protect against the incurrence of excessive operating costs by Trading Cove.
Since Trading Cove's relinquishment fee agreement has a limited life of 15 years, revenues from the Mohegan Sun will need to be strong enough to provide for sufficient funds to cover principal repayment on the notes over this period. At the Mohegan Sun's current rate of operating results, cash flows paid to Waterford would most likely not provide for full repayment of principal and interest obligations. However, following the Mohegan Sun's expansion, we expect the casino's operating results to significantly improve and consequently expect a commensurate improvement in Waterford's results. Unmet demand at the Mohegan Sun during weekends, strong demographics of the northeastern gaming market, and the addition of amenities should collectively contribute to the Mohegan Sun's continued success.
Due to Waterford's reliance on a single property, a key risk for investors is the impact from new competition in the Mohegan Sun's market. Although we do not foresee any new competition over the next several years, the longer term threat always exists. Barriers to entry are extremely high in the northeastern gaming market. Native American tribes in surrounding states and Connecticut have clamored for the opportunity to open casinos for several years; however approval from the Federal Bureau of Indian Affairs ("FBIA") is difficult to receive. Commercial casinos are similarly difficult to establish, with most states requiring the passage of a state-wide referendum. Furthermore, the legalization process is slow, generally taking many years to complete.
With only one formidable competitor in the Mohegan Sun's market, the Foxwoods Resort Casino, the Mohegan Sun has been able to avoid excessive marketing expenses. Although the potential for escalating marketing costs exists and thus lower profitability of the Mohegan Sun, the revenue based structure of the relinquishment agreement provides protection against potential cost increases.
Debtholders ability to recover assets in a stress case scenario is highly uncertain. In the event of a default by the MTGA on its debt obligations, the potential exists for MTGA to reject the relinquishment fee agreement with Trading Cove, leaving Trading Cove with an unsecured claim against MTGA. Since only the Mohegans have the authority to operate the casino, recovery value to noteholders could be significantly diminished. In addition, although the tribe has waived sovereign immunity, it is unclear whether this waiver would be upheld. Due to this legal uncertainty, at the least, creditors' ability to recover could be delayed.
Waterford Gaming L.L.C. holds a 50% partnership interest in Trading Cove Associates, a Connecticut general partnership and the manager of the Mohegan Sun casino.
No Related Data.
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