MOODY'S ASSIGNS B3 RATING TO ISLE OF CAPRI BLACK HAWK'S 1ST MORTGAGE NOTES
New York, 08-13-97 -- Moody's Investors Service assigned a B3 rating to the proposed $75 million of first mortgage notes due 2004 of Isle of Capri Black Hawk L.L.C. and its co-issuer and subsidiary Isle of Capri Black Hawk Capital Corp. The company was recently formed to develop a new casino in Black Hawk, Colorado. The project will be financed with the net proceeds of the note offering, $15 million in equity contributions, and $15 million in furniture, fixtures and equipment financing.
The rating reflects the company's start-up nature; single revenue source; high leverage; and anticipates an increase in competition over the next several years. The rating also recognizes that Isle of Capri's site positions it to capture market share from the Denver gaming market, but also takes into account the possibility that a road may be constructed that could divert traffic away from its casino.
Availability of parking and location are key drivers of the success of gaming ventures in the Black Hawk and Central City valleys, which are located 40 miles west of Denver. The narrowness of the two valleys limit the size of the roads and the space available for ground level parking. But since gaming customers must drive through Black Hawk to get to its neighboring Central City casinos--which also has less parking availability--the Black Hawk market has quadrupled its gaming revenues since 1992, while Central City's revenues have remained relatively flat. As new and existing Black Hawk casinos add parking facilities, Moody's believes that Black Hawk casinos should be able to take market share away from Central City casinos.
Isle of Capri's new facility is well positioned to benefit from this trend. It will be one of the first casinos travelers will encounter driving on route 119 from Denver, which is Black Hawk's primary source of gamers. It will have adequate parking, including a 1,000 space garage connected to the casino. Moody's believes that Isle of Capri's location advantage and sufficient parking should help it realize revenues in excess of its proportional market share.
However, the possibility does exist for a road to be built that would directly connect route I-70, which is the main artery from Denver, to Central City, bypassing Black Hawk. Such a road could be an attractive alternative for gaming customers who currently have to cope with traffic congestion on route 119 during peak gaming periods. But while lack of parking space in Central City might divert traffic back through Black Hawk, Isle of Capri's casino would then be one of the last casinos encountered when driving from Central City. However, the development of this road is uncertain because of issues including cost, financing, and the need to acquire certain land parcels that the road must cross to reach Central City.
Another risk is the increase in capacity planned over the next several years within Black Hawk. The new casino will face competition from The Riviera, 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, Moody's is concerned that gaming demand will be unable to keep pace with the increase in gaming capacity and result in lower revenues and margins.
While the Black Hawk market achieved an annual compounded growth rate averaging 41% over the past four years, it has dropped to 12% last year. We believe that this market may continue to level off in the near-term due to traffic constraints getting into and through Black Hawk, the lack of hotel rooms in the area, and the existence of a $5 betting limit at all Colorado casinos. However, because of the critical mass that the larger casinos will create in Black Hawk, their superior parking advantage, ability to offer added amenities, and more substantial marketing programs, we expect that the Isle of Capri and other larger casinos will benefit by stealing market share from the smaller operators.
The company is subject to construction, excavation, licensing delays and other initial operating risks. Although it has received "guaranteed maximum price" contracts for its casino, it is still vulnerable to weather and engineering delays and unforeseen non-guaranteed cost overruns. If significant cost overruns do occur, the company's liquidity would be at risk.
The opening of new gaming jurisdictions in Colorado is always a possibility, but Moody's does not believe it is likely over the intermediate term. Colorado law requires statewide voter approval for any expansion of gaming which was attempted in 1994 and 1996 and defeated by wide margins. In addition, the Colorado governor is anti-gaming.
Although neither of the company's two owners guarantee the proposed notes, Isle of Capri has budgeted a $5 million completion reserve and a $2.2 million contractor's reserve; and Casino America has provided a $5 million capital commitment if the casino is not completed by April 1, 1999.
Casino America's management fee will be 2% of revenues plus 10% of EBITDA not to exceed 4% of revenues, and will be subordinated to all obligations under the notes in the event of a default. The indenture lacks a provision to defer management fees in the event that financial results are below certain thresholds.
Proceeds from the note offering will be placed in escrow pending their use, including an amount equal to the first 18 months of interest payments. The notes are secured by a first priority security interest (except for mechanics' liens and leased furniture, fixtures and equipment) in the assets of the company.
Isle of Capri Black Hawk L.L.C. and Isle of Capri Black Hawk Capital Corp. were recently formed by Casino America, Inc. and Nevada Gold & Casinos, Inc. to develop a new casino in Black Hawk, Colorado.
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