MOODY'S CHANGES RATING OUTLOOK ON RIVIERA HOLDINGS TO NEGATIVE FROM STABLE
Moody's Investors Service changed the rating outlook on Riviera Holdings Corporation (RHC) to negative from stable. At the same time, Moody's confirmed the B1 rating on the company's $175 million issue of 10% senior secured first mortgage notes, due 2004, and confirmed its B1 senior implied rating.
The negative outlook reflects the company's declining operating income; new competition on the Las Vegas strip; thin interest coverage and increasing leverage; downward pressure on room rates; and Moody's expectations that near-term cash contributions to RHC from its casino project in Black Hawk, Colorado following its completion may be limited. However, the ratings also reflect the company's significant cash position; niche convention business; and increased diversification from the Black Hawk expansion.
Despite a steady top-line revenue performance and marginally decreasing EBITDA, operating income has steadily declined since fiscal 1996. Operating margins have declined over the past twelve months ended March 31, 1999 to a current level of 9.5%, down from 14.2% at the end of 1996. Since 1996, the company has completed several expansion projects that have included the addition of new slot facilities and convention space. However, its expansions thus far have not improved operating profits. Should the company's profits continue to weaken or even remain stable, we expect that increased capital expenditures necessary to support the company's recent expansion projects (which is reflected in its higher depreciation charges) will continue to contribute to a reduction in free cash flow.
Credit measures are weak with EBITDA-to-Interest coverage and operating income to interest of only 1.6 times and .9 times, respectively, and debt-to-EBITDA of 6.3 times for last twelve months ended March 31, 1999. However, the most significant problem facing the Riviera is the addition of a significant amount of new hotel and gaming capacity. Since the opening of Bellagio (October 1998) and Mandalay Bay (March 1999), the prognosticators of growth such as visitor count and gaming revenues have been encouraging. However, first quarter results do not yet reflect the impact of the added capacity from the Venetian (opened early May), Paris (September 1999), and Aladdin (2000) and the full ramp-up of operations at these new mega-resorts.
During the first quarter of 1999, the Riviera lowered its average daily room rates by 4.5% in order to maintain occupancy levels in the mid-to-upper 90% range. The ability to place "heads in beds" to fill up the casino is critical for casino operators, yet the company may be sacrificing room revenues to keep the casino filled. Room revenues typically comprise about 25% of the company's total revenues. We believe that due to its unfavorable location and older facility, the Riviera may face continued negative pricing pressure as additional room supply opens along the Strip, thus having an adverse effect on cash flow.
The company is in the midst of constructing a wholly owned casino project in Black Hawk, Colorado. The casino is expected to open in January of 2000 and will provide an entry into the growing Colorado gaming market. However, the company has entered into a "keep-well" agreement that may expose the parent to cash outlays should the project not comply with cash flow targets. As part of the "keep-well" agreement, Riviera Holdings is required to provide up to a maximum of $10 million over a three year period, should Riviera Black Hawk be unable to generate $7.5 million in EBITDA per year. Assuming that the Riviera Black Hawk is a modest success, in our opinion it's unlikely that RHC will see a meaningful upstream of cash flow from this project in the near term due to planned fixed charges associated with servicing its planned debt capacity.
Nonetheless, RHC's liquidity is supported by the company's sizable cash position of $40 million (which should increase to about $47 million following the offering) of which the company estimates about $7 million is required for working capital purposes. While this cash cushion provides near-term liquidity support for the company, as competition intensifies and losses potentially widen, we would not be surprised to see these funds diminish.
The Riviera has developed a steady convention business that can be attributed to a recently expanded 160,000 square foot convention center and value priced room rates that appeal to low-to-mid tier convention customers. The company's strategy is to fill 30% of available room nights with convention customers, compared to 25% currently, in order to maintain and potentially drive higher room rates. Although convention space is being added throughout Las Vegas and at the nearby Venetian, we expect the Riviera to maintain a stable convention business in the intermediate term due to its niche focus.
Over the long-term, we believe that the company's diversification into Black Hawk is a positive move, particularly based upon the favorable demographics and strong performance of the Black Hawk market. The Black Hawk/Central City gaming markets have generated a steady 19% CAGR since 1992. In 1998, gaming revenues increased to $272 million, representing a 15.9% improvement over 1997. Black Hawk accounted for nearly 75% of total gaming revenues in the combined markets during 1998, and continues to take market share from the location disadvantaged Central City.
Riviera Holdings Corporation owns and operates the Riviera Hotel and Casino on the Las Vegas Strip, manages the Four Queens Hotel/Casino in downtown Las Vegas, and is developing a casino in Black Hawk, Colorado.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com
under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.