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Rating Action:

Moody's affirms SugarHouse's B3 CFR and stable outlook; assigns B3 to proposed notes

07 Apr 2011

Approximately $235 Million of Debt Securities Affected.

New York, April 07, 2011 -- Moody's Investors Service today affirmed SugarHouse HSP Gaming Prop. Mezz, LP's (HSP) Corporate Family and Probability of Default ratings at B3. At the same time, Moody's assigned a B3 rating to HSP's proposed $235 million 2nd lien senior secured notes due 2016. The rating outlook is stable.

Net proceeds from the proposed offering will be used to refinance the company's $10 million B3-rated revolver expiring 2014, $185 million B3-rated term loans due 2014, $21 million unrated term loan due 2014, and $20 million of outstanding furniture, fixture and equipment loans. Moody's will withdraw the ratings on the company's revolver and term loans once the transaction closes.

The ratings are subject to review of final terms and documentation.

Ratings affirmed:

Corporate Family Rating at B3

Probability of Default Rating at B3

Rating assigned:

$235 million 2nd lien senior secured notes due 2016 at B3 (LGD 4, 55%)

Ratings affirmed and to be withdrawn when the transaction closes:

$185 million senior secured term loans due in 2014 at B3 (LGD 3, 49%)

$10 million senior secured revolver expiring 2014 at B3 (LGD 3, 49%)

RATINGS RATIONALE

The affirmation of HSP's B3 Corporate Family Rating (CFR) reflects the company's small, single asset profile and limited operating history. HSP only recently opened the SugarHouse Casino -- the company's only casino asset and source of debt repayment -- in September 2010. As a result, SugarHouse is still going through its critical ramp-up period with no assurance that the casino will meet its longer-term financial targets. Additionally, Moody's expects that SugarHouse will only generate net revenue of between $220 million and $240 million, and EBITDA of between $45 million and $55 million of EBITDA in its first full year of operations, relatively small amounts compared to many other rated casino companies.

The B3 CFR also incorporates Moody's expectation that debt/EBITDA (including Moody's standard analytical adjustments as well as the application of 75% equity credit to the company's original $159 million preferred equity interest) will likely remain high, at above 5.5 times through fiscal 2012, and that interest coverage will likely be between 2.0 times and 2.5 times through that same period.

Concurrently with HSP's proposed note offering, it plans on entering into an agreement for a new $10 million revolver. That credit agreement is expected to include a limit on additional debt through a 1.15 times maintenance-based interest coverage ratio covenant. However, Moody's expects the proposed note indenture will include a permitted debt basket of $90 million to allow for the funding of a future expansion assuming certain conditions are met.

Positive ratings consideration is given to the population density and favorable demographics of SugarHouse's primary market area -- the Philadelphia area. SugarHouse's location is an important competitive advantage over many other eastern Pennsylvania casinos as well as the Atlantic City casinos as gaming consumers have demonstrated a strong preference for convenience. Also considered is the benefit of the proposed refinancing which will relax the company's debt maturity profile and lower total annual interest cost by approximately $5 million to $22 million per year. HSP's nearest material scheduled debt maturity will be 2016 when the company's proposed notes mature.

The B3 rating on the 2nd lien senior secured notes -- the same as the CFR -- reflects the fact that the 2nd lien debt currently makes up the preponderance of HSP's capital structure.

The stable rating outlook reflects Moody's expectation that SugarHouse's primary market area will provide enough customer traffic and demand for the project to more than cover its fixed charge obligations, meet its interest coverage test, and generate cash flow after all scheduled debt service obligations, income tax payments and maintenance capital expenditures of about $15 million to $20 million. The stable outlook also considers that HSP's ability to distribute cash dividends will be governed by a restricted payments test that only allows the company to dividend $15 million in aggregate as long as the proposed indenture is in effect, and slightly more if the company is able to achieve secured debt/EBITDA at or below 5.0 times.

Ratings could be lowered if SugarHouse's win per unit statistics for slots and table games, and monthly gaming revenues as reported by the Pennsylvania Gaming Control Board exhibit a material decline for any reason. Ratings could also be lowered if the company does not demonstrate the ability to generate positive free cash flow. Independent of any change in HSP's CFR, and absent any other material changes to Moody's view of the company's operating performance and capital structure, the proposed 2nd lien notes would likely be lowered one-notch if the company uses its permitted debt basket to issue debt that ranks ahead of the proposed notes to fund an expansion.

Ratings improvement is limited at this time given the casino's limited operating history and Moody's opinion that there is a high probability that HSP will issue additional debt under its permitted debt basket to fund a future expansion. However, if it appears that operating results will exceed Moody's current expectations for fiscal 2012, and the company's earnings outlook is favorable for 2013, HSP's ratings could be raised one-notch, even if it pursues an expansion utilizing the full $90 million permitted debt basket.

The principal methodologies used in this rating were Global Gaming published in December 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Please see ratings tab on the issuer/entity page on Moodys.com for the last Credit Rating Action and rating history.

SugarHouse HSP Gaming Prop. Mezz, LP operates the SugarHouse Casino -- which opened in September 2010 -- along the Delaware River waterfront in Philadelphia, PA. HSP Gaming, LP, the parent company of HSP, was selected as a category 2 gaming licensee by the Pennsylvania Gaming Control Board in December 2006. The company is majority owned and controlled by Neil Bluhm, his family, and Greg Carlin.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Keith Foley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms SugarHouse's B3 CFR and stable outlook; assigns B3 to proposed notes
No Related Data.
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