MOODY'S LOWERS RATINGS OF RIVIERA HOLDINGS' FIRST MORTGAGE NOTES TO B2; OUTLOOK STABLE
Moody's Investors Service downgraded Riviera Holdings Corporation's $175 million of 10% senior secured first mortgage notes, due 2004 to B2 from B1. The senior implied rating was lowered to B2 from B1 and the senior unsecured issuer rating was lowered to B3 from B2. In addition, the outlook was changed to stable from negative.
The lower ratings reflects the company's continued weak operating results; thin coverage of interest expense with cash from operations; increasing leverage; and our expectations that its Black Hawk, Colorado subsidiary will generate limited cash flow for Riviera Holdings.
However; the ratings also consider the company's sizable cash position of $44 million in unrestricted cash; its niche convention business; and increased diversification from its expansion into Black Hawk.
The stable outlook reflects our expectations that over the next 12 to 18 months the company's cash flow generation from operations should remain flat compared to its current position. Moody's expects that continued potential weakness of Riviera's Las Vegas operations will be partially offset by several million dollars of management fees generated from the company's casino in Black Hawk.
Over the past nine months, the company's revenues have been flat, but with the addition of four new "must-see" attractions on the Las Vegas Strip, operating income has been negatively impacted. For the nine months ended September 30, 1999, revenues and EBITDA were $119.9 million and $19.1 million, respectively, compared to revenues and EBITDA of $120.8 million and $22.3 million, respectively in the same period for 1998. Furthermore, the company's operating income, after adjusting for non-recurring corporate expenses and pre-opening expenses related to its Black Hawk casino, declined by 35% to $8.7 million for the nine months ended September 1999 compared to 1998. Despite the strong overall growth of Las Vegas visitors year-to-date, Moody's believes that the Riviera will continue to be challenged due to its older facility and poor location, and due to the attractiveness of the newer properties.
As a result of waning cash flow results, interest coverage has weakened to thin levels. On a trailing twelve months basis, EBITDA and EBIT coverage levels stood at 1.2-times and 0.6-times, respectively. With $177.6 million of total debt at the parent level (excluding Riviera Black Hawk), leverage as measured by debt-to-EBITDA has increased to 6.9-times from 6.0-times for the twelve months ended, September 30, 1999 from the year ended 1998.
In September, the company's subsidiary Riviera Gaming Management-Elsinore terminated its contract to manage the Four Queens Hotel and Casino. While the Four Queens management contract did not contribute meaningfully to revenues and EBITDA (about $1 million per year), the loss of this income stream serves as a negative strike for a company with a limited revenue and cash flow base.
In order to maintain occupancy levels and keep its casino filled, Riviera has sacrificed average daily rates (ADR). During fiscal 1999, Riviera has done a credible job of maintaining occupancy rates in the mid-to-high 90% range (99.1% in the third quarter), however ADRs have dipped throughout the first nine months of the year. During the third quarter, ADR dropped to $45.89 from $47.85, or 4.2% lower than the previous year. Moody's expects that with the significant supply of new rooms added to Las Vegas recently will continue to pressure Riviera's room rates.
Nevertheless, the company's downside from its hotel business should be limited due to the stability that its convention business provides in terms of room rates and occupancy. Riviera recently expanded its Royale Pavilion convention center by 60,000 square feet to 160,000 square feet, which should help to generate significant advance room bookings.
Over the next 12 to 18 months, Moody's does not believe that the company will benefit from significant cash flows derived from its Black Hawk, Colorado project. Following its anticipated January 2000 opening, management expects that the cash flow contribution will be about $2 to $3 million over a full year. Although Moody's expects that Riviera Black Hawk will be a successful property, should the casino under-perform, Riviera Holdings may be compelled to invest additional equity to support its investment or be legally obligated to make an investment. As part of its "keep-well" agreement with its subsidiary, 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 $9.0 million in EBITDA per year.
Riviera Holdings Corporation owns and operates the Riviera Hotel and Casino on the Las Vegas Strip and is developing a casino in Black Hawk, Colorado.
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