MOODY'S CHANGES OUTLOOK ON MAJESTIC STAR TO STABLE FROM POSITIVE AND CONFIRMS SR SEC NOTES AT B2
New York, May 17, 2000 -- Moody's Investors Service confirmed the B2 rating of The Majestic Star Casino, LLC and its co-issuer and wholly owned subsidiary, The Majestic Star Casino Capital Corp.'s $130 million issue of 10.875% senior secured notes, due 2006. Moody's also confirmed the B2 senior implied rating and the B3 senior unsecured issuer rating, and changed the outlook on the ratings to stable from positive.
The change in outlook reflects the property's lack of meaningful improvement in operating results, which has been affected by the implementation of dockside gaming in the neighboring state of Illinois since mid 1999. The stable outlook reflects our expectations that the favorable demand and supply characteristics of the Chicago market will continue to result in stable operating results for the company.
The ratings continue to reflect the company's dependence on a single revenue source and its small scale of operations; its high leverage and modest interest coverage; and its vulnerability to weather and regulatory uncertainties. However, the ratings also reflect stable operating results; the strong demographics and growth of the Chicago gaming market; the limitation on new competition resulting from a fixed number of gaming licenses in Illinois and Indiana; and the potential for long-term benefits associated with the development of retail, entertainment, and parking amenities.
Since the June 1999 implementation of dockside gaming in Illinois, riverboat casinos in that state have collectively experienced tremendous growth in gaming revenues. From July 1999 through April 2000, Illinois revenues increased by a substantial 35% on average for the Chicago based casinos versus the prior year. However, the convenience of dockside gaming in Illinois has made it more competitive for Indiana casino operators. Although Majestic Star has been able to maintain a stable revenue base, it has been necessary for the company to increase its marketing costs in order to retain its customers. Consequently, Majestic Star's EBITDA since July 1999, has modestly declined.
For the nine months ended March 31, 2000, the period since dockside gaming was introduced in Illinois, Majestic Star's net revenues have increased to $90.5 million from $87.1, but its EBITDA has declined to $18.6 million from $19.7 million compared to the same period the prior year. For the twelve months ended March 31, 2000, the company's leverage remains high at 5.0 times debt to EBITDA and coverage of interest expense with EBITDA is a modest 1.8 times.
Modest upside to the company's results may be realized over the near-term due to the company's new advertising and marketing initiatives. However, because of the increased competitive conditions stemming from dockside gaming in Illinois and from the success that Harrah's has been able to achieve at its casino in East Chicago, Indiana, Moody's anticipates that the company will continue to be challenged to realize significant improvement over its current operating levels. In addition, the company may benefit over the intermediate term from its planned addition of a parking garage. However, Moody's does not expect that the incremental benefit from these initiatives will be enough to result in a rating upgrade.
The company plans to develop the garage through its joint venture subsidiary which would finance most of its cost on a non-recourse basis to Majestic Star. The total cost of the 2,000 space parking garage is expected to be $38.5 million, with a net cash contribution from Majestic of up to $1.4 million. Following its completion, Majestic will be liable for lease payments of several million dollars per year to its joint venture company that will service the debt incurred to pay for the garage. The company expects that such lease payments will be approximately equal to the current lease payments that will be eliminated on land that will be acquired to build the garage and a reduction in operating expenses for valet parking services.
Although the potential for regulatory relief (i.e. dockside gaming) exists in Indiana, the ultimate outcome of this amendment is highly unpredictable and cannot be relied upon. However, should Indiana eventually allow dockside gaming, the benefit to Majestic Star's operating results would most likely be significant.
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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