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Global Credit Research - 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.
Corporate Family Rating at B3
Probability of Default Rating at B3
$235 million 2nd lien senior secured notes due 2016 at B3 (LGD
Ratings affirmed and to be withdrawn when the transaction closes:
$185 million senior secured term loans due in 2014 at B3 (LGD 3,
$10 million senior secured revolver expiring 2014 at B3 (LGD 3,
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
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
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
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
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.
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
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms SugarHouse's B3 CFR and stable outlook; assigns B3 to proposed notes
250 Greenwich Street
New York, NY 10007
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