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Rating Action:

MOODY'S ASSIGNS B2 TO MAJESTIC STAR'S SR SEC NOTES

28 Oct 1996
MOODY'S ASSIGNS B2 TO MAJESTIC STAR'S SR SEC NOTES New York, 10-28-96 -- Moody's Investors Service assigned a B2 rating to Majestic Star Casino LLC's $105 million issue of 12-3/4% senior secured notes due 2003.
The rating reflects the company's short operating history, dependence on a single source of revenue, vulnerability to weather and regulatory uncertainties, and new capacity entering the northern Indiana gaming market, where it operates its sole riverboat casino. However, the rating also reflects the deep Chicago-area gaming market and the anticipated replacement of the company's chartered riverboat with a new, larger vessel, as well as the competitive advantages of offering choice and staggered cruising schedules (which limits customer waiting time) at Buffington Harbor (Gary, Indiana), where Majestic Star shares common facilities with Trump Hotels and Casino Resorts.
Since its June 1996 opening, Majestic Star has outperformed the projections in its offering memorandum. Slot win per day has averaged over $200 compared to the projected $165, while table win is now exceeding projected levels. In September 1997, the company's existing chartered riverboat will be replaced with a new $40 million vessel. The new riverboat will nearly double the company's current number of slot machines, thereby increasing revenues, particularly during capacity constrained weekends.
Prior to last week, Indiana riverboat casinos located on Lake Michigan did not cruise due the Johnson Act, which prohibits gambling on federal waters. This prohibition worked to the company's advantage, since cruising is expensive and customers generally prefer to remain dockside. However, a new bill exempting Indiana from the Johnson Act was signed by President Clinton last week. As a result, Indiana law has come into effect, requiring the riverboats to cruise. The new requirement to cruise may hurt northwest Indiana riverboats such as Majestic Star, which have been drawing some customers from cruising Illinois riverboats.
Under Indiana law, Indiana riverboat passengers must wait up to an hour and one-half to board, regardless of whether the riverboat is actually cruising or is "simulating" a cruise. Buffington Harbor's two-boat facility (Majestic Star and Trump) staggers cruising times, thereby offering patrons not only a choice of casinos, but a maximum waiting time of only one-half hour to board. While this is a big competitive advantage, when a competitor, Showboat Marina, opens in Spring/Summer 1997, it will probably stagger its boarding times with Empress Hammond, another competitor, thereby providing gamblers a de facto minimum boarding time.
Although currently offering a short wait, Buffington Harbor has yet to experience the full impact of poor winter weather conditions. While midwesterners are famous for defying cold, windy weather, they face a long walk or shuttle from the parking lot (there is no parking structure) to Buffington Harbor's pavilion. Potential customers may also be discouraged by choppy seas, which have caused the Trump Princess to close for brief periods.
Further competitive challenges await the Majestic Star next summer when new casinos will open to the east and west. To the west, Showboat Marina will open a $195 million complex, with 51,000 square feet of gaming. Many Chicago gamblers will have to drive by this new casino as well as Empress's Hammond facility in order to reach Buffington Harbor. To the east, Blue Chip Casino plans to open a riverboat casino in Michigan City, IN, which will intercept some of Buffington Harbor's northeastern Indiana/southern Michigan customers. Increased Chicago area capacity is also possible over the medium term. Governor Edgar has suggested that a major riverboat bill (perhaps granting licenses for Calumet City and Chicago) may surface during the post-election veto session of the General Assembly. However, Mayor Daley and some legislators have expressed skepticism at a grand compromise, particularly in light of a recent poll showing that about two-thirds of Illinois residents oppose expansion of gaming.
Moody's also notes that joint ventures are inherently less stable than sole ventures, in which management has complete control over decision making. To the extent that Trump and Majestic Star jointly market the facility, both companies gain; but to the extent that they fight for the same passengers (a more likely event if Indiana at some point approves dockside gaming without cruises or simulated cruises), there is a risk of increased promotional/marketing costs.
Despite Moody's expectation of near-term problems in absorbing extra capacity, the Chicago gaming market enjoys strong demographics. It has one of the highest ratios of adults to gaming positions of the major day-trip gaming markets and benefits from relatively high average household incomes.
In addition, standing alone, the Hammond/Gary area is relatively dense, with about 1.8 million adults living within 25 miles. Buffington Harbor should also capture much of the northern Indiana gaming market because of its proximity to Interstate 65, which extends south to Indianapolis. Under current law, the Chicago area gaming market will continue to be underserved because the number of licenses granted on Lake Michigan is limited to five and licenses (and gaming positions) are limited in Illinois.
The Majestic Star Casino, LLC owns and operates a riverboat casino at Buffington Harbor in Gary, Indiana, where the company is headquartered.
No Related Data.
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