MOODY'S ASSIGNS B2 TO SENIOR SECURED NOTES OF MAJESTIC STAR CASINO, L.L.C. (POSITIVE OUTLOOK)
Moody's Investors Service assigned a B2 rating to the $130 million of senior secured notes, due 2006, of The Majestic Star Casino, LLC and its co-issuer and wholly owned subsidiary, The Majestic Star Casino Capital Corp. The senior implied rating is B2 and the outlook is positive.
The ratings reflect the company's dependence on a single revenue source; its high leverage and modest interest coverage; the potential negative impact of dockside gaming and an additional competitor in Illinois; and its vulnerability to weather and regulatory uncertainties. However, the ratings also reflect Majestic Star's steady improvement in operating results; overall growth of the Chicago gaming market and its strong demographics; the benefit of a staggered cruising schedule with Trump Indiana, particularly compared with its nearby Indiana competitors; and the potential long-term benefits from the planned development of retail, entertainment, and parking amenities.
The positive outlook reflects the potential that the company's operating results will continue to improve and that its credit measurements will strengthen, considering its recent positive operating trends and the strength of the Chicago area gaming market, despite dockside gaming and an additional competitor in neighboring Illinois.
Net proceeds from the offering will be used primarily to redeem the existing $105 million of 12-3/4% senior secured notes, due 2003, and to pay $18.4 million for a tender premium and accrued interest. The B2 rating on the existing notes will be withdrawn following their redemption.
The Majestic Star resides in Buffington Harbor (Gary, Indiana) alongside Trump Indiana and is the third largest riverboat in the Chicago market in terms of gaming space and features 1,462 slot machines and 56 table games. In 1996, the company initiated operations with a temporary gaming vessel that was eventually replaced with a modern 360-foot long boat in October 1997.
The Majestic Star has steadily improved its financial results after realizing more than a full year of operations utilizing its new boat. However, this improvement does not alleviate the primary risk to bondholders; the notes are supported by a single source of cash flow. As of April 30, 1999, pro-forma leverage is substantial with debt-to-EBITDA of 5.2 times and debt-to-capitalization of 117%. The company has pro-forma negative equity of $19.3 million which has been exacerbated by the call premium associated with the repurchase of the existing notes. Interest coverage will improve due to a lower anticipated cost of capital but will be modest upon completion of the offering. Pro-forma for the twelve months ended April 30, 1999, EBITDA-to-interest and EBIT-to-interest should be close to 2.0 and 1.4 times, respectively.
On May 25th, the Illinois Senate voted in favor of House amendments to Senate Bill 1017 that will most notably: 1) eliminate the current cruising requirements and boarding restrictions, and thus permit dockside gaming, and 2) reassign the dormant Silver Eagle gaming license to Rosemont (near O'Hare Airport), allowing an additional casino to open in the northwest Chicago market. Governor Ryan is expected to sign the legislation within weeks at which time it will immediately take effect. Currently, the Majestic Star benefits from a staggered cruising schedule with its neighbor (Trump Indiana) that decreases the maximum one and one-half hour waiting time customers face to gamble on Indiana riverboat casinos to one-half hour. However, with the passage of dockside gaming in Illinois, customers at the Illinois casinos will no longer be inconvenienced by rules that limit their ingress and egress from Illinois casinos. Since customers generally prefer to remain dockside, Indiana riverboats will be at a competitive disadvantage and may be adversely impacted by this change as well as by the addition of another competitor in the Chicago market.
Nevertheless, the potential impact of this legislation on Majestic Star should be modest over the long-term. The addition of a new casino in Rosemont, which could take one to two years to open, should have a negligible impact on Indiana casinos since a capacity increase will most likely be rapidly absorbed due to the strong demographics and growth characteristics of the Chicagoland market. In addition, since Rosemont is located to the northwest of Chicago, the location of this casino will most likely not be attractive to the majority of Majestic's customers, which the company believes reside within the southeast of Chicago. Although the change to dockside gaming in Indiana is more of an immediate concern to the Illinois casinos, the potential impact to Majestic Star should be mitigated by its availability of staggered cruising times with Trump and due to the current limitation on Illinois casinos to 1,200 gaming positions (which does not pertain to the Indiana casinos). This limitation has resulted in many of the Chicagoland Illinois casinos to be operating at or near maximum capacity during peak gaming hours, and consequently may dissuade many current Indiana customers from gaming in Illinois during such periods.
With the outcome likely that Illinois will allow dockside gaming, it is possible that Indiana will attempt to approve dockside gaming in order to remain competitive with Illinois casinos. However, regulatory actions are unpredictable and therefore cannot be relied upon. Furthermore, while there are no current regulatory amendments or proposals that would adversely impact Indiana casinos (such as an increase in Indiana gaming taxes or additional casinos in the Chicago market beyond the casino in Rosemont), Majestic Star is highly susceptible to such unpredictable actions due to its reliance on a single casino site.
Moody's also notes that riverboat operators in the Chicago market can be impacted from unpredictable adverse winter weather near the "Windy City". Early January 1999 proved to be a difficult time for Majestic Star, as treacherous conditions prompted management to cease operations on New Year's weekend. The company estimates that its revenues were adversely impacted from this event by $1.5 million.
For the last twelve months ended March 31, 1999 the property generated $115.3 million of revenue and $24.9 million of EBITDA, up from $94.5 million and $12.7 million, respectively, in 1997. Beginning with the first full quarter of operations in the new facility (first quarter of 1998), the company has had five consecutive quarters of sequential margin improvement from 16.1% (Q1 98) to 23.7% (Q1 99). In spite of the rough weather in early January, the casino posted a strong improvement in win per slot during the first quarter with an average of $186 versus $156 in the prior year. Although the company has underperformed its peers in terms of win per position and fair share (share of market revenues/share of market positions), we believe this progress indicates the potential for continued improvement in operating results at this facility.
The Chicagoland gaming market, which comprises Chicago and Northern Indiana is one of the fastest growing gaming markets in the country and is supported by strong demographics. In 1998, the market generated revenues of $1.5 billion, a 19.2% increase over 1997. The market area contains 9 million adults, of which more than 60% reside within 50 miles of the market center. Population growth and average incomes in the Chicagoland area are higher than national averages. As compared with other major riverboat gaming jurisdictions, Chicagoland has a lower average win per position, which suggests room for the market to grow. With the cessation of cruising requirements in Illinois, we expect the market to be positively impacted in terms of revenue growth as participation rates should improve.
We expect that the Majestic Star should benefit from the planned development of additional parking amenities. Management expects that its joint venture partnership with Trump Resorts in Buffington Harbor Riverboats, LLC will develop a $35 million 1,600 space parking garage that will be attached to the Buffington Harbor embarkation facility. Although management expects to finance the majority of this project on a non-recourse basis to the company through its partnership, the financing has yet to be arranged and could potentially further increase the company's leverage if funded by Majestic.
Don H. Barden, the sole shareholder of Majestic Star, is expected to make a commitment of $10 million by December 31, 1999 to develop land adjacent to the casino. This investment will help to fulfill a development commitment that the Majestic Star made with the City of Gary when it was awarded its site. Although the development plans are in their early stages, the addition of retail and entertainment facilities could increase foot traffic at the gaming complex.
Additional liquidity is expected to be provided from an undrawn $20 million revolving credit facility that will be committed to the company upon approval from the State of Indiana following the bond offering. The notes will be secured by substantially all current and future assets of the Majestic Star, but will be effectively subordinated to the secured credit facility. The indenture to the notes will allow the company to incur additional indebtedness as long as it maintains a 2.0 times interest coverage ratio. This limitation will not prohibit the company from drawing the full amount of its $20 million revolver, incurring $5 million in purchase money obligations, $9.8 million for equipment financing, or $5 million for other indebtedness.
The Majestic Star Casino, LLC owns and operates a riverboat casino at Buffington Harbor in Gary, Indiana, where the company is headquartered.
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