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Rating Action:

Moody's assigns B2 CFR and stable rating outlook to Herbst Gaming, LLC

27 Jan 2011

New York, January 27, 2011 -- Moody's Investors Service today assigned a B2 Corporate Family Rating (CFR) and a B3 Probability of Default Rating (PDR) to Herbst Gaming, LLC (Herbst). A B2 was assigned to the company's $350 million senior secured term loan due 2015. The rating outlook is stable.

New Ratings Assigned:

Corporate Family Rating at B2

Probability of Default Rating at B3

$350 million senior secured term loan due 2015, at B2 (LGD 3, 35%)

RATINGS RATIONALE

Herbst's B2 CFR considers the company's significant exposure to Nevada gaming markets and its high leverage. This subjects the company to greater risks than a gaming company that operates in a more stable gaming market and is more geographically diverse. The ratings are supported by the solid performance of the company's Midwest casino properties and the company's good liquidity profile. Although Herbst does not have a committed bank revolving credit facility at this time, it does have about $100 million of excess cash that should be sufficient to help fund short term working capital or modest capital expenditure needs.

Approximately 65% of Herbst's consolidated net revenue and 35% of its property-level EBITDA comes from the company's Nevada casinos and route operations. Nevada was hit extremely hard by the recent recession, continues to have one the highest unemployment rates in the U.S., and will likely be one of the slowest gaming markets to recover.

Herbst's debt/EBITDA is high at approximately 5.0 times. While some leverage reduction is possible, it's not expected to be material in the next two years. The company has experienced some recent improvement in its Nevada casino segment, but that was largely due to cost cutting initiatives. While effective in mitigating some revenue risk, Moody's does not expect that these cost cutting initiatives alone will improve consolidated EBITDA enough to materially change the company's leverage profile in the foreseeable future.

Herbst's Midwest casinos' revenue, EBITDA and EBITDA margin have improved during the recession. Moody's expects this trend to continue in the foreseeable future as the gaming demand environment in Iowa and Missouri improves further and the competition in these markets remains limited.

Herbst's B2 CFR is one notch higher than its B3 PDR, reflecting the utilization of a family recovery rate of 65%. The higher than average family recovery rate reflects Herbst's all bank capital structure, which in Moody's view gives lenders a better ability to take prompt action if the company's credit profile deteriorates, thereby providing greater-than-average recovery values.

The stable rating outlook reflects Moody's anticipation that earnings improvement at Herbst's Midwest casinos will offset continued earnings pressure at its Nevada casinos and route operations. As a result, the company will be able to maintain credit statistics adequate for the current rating. The stable outlook also incorporates Moody's opinion that Herbst has the liquidity to absorb further and moderate decline in earnings.

Ratings could ultimately be considered for an upgrade if Herbst's operating performance improves and EBIT/interest expense exceeds 2.0 times and debt/EBITDA drops below 4.0 times. However, the company's small scale and limited diversification would likely limit the degree of any ratings improvement. Ratings could be downgraded if operating performance or liquidity deteriorates for any reason. Additionally, if debt/EBITDA is not maintained below 5.5 times and EBIT/interest expense drops below 1.25 times, there could be negative pressure on the ratings or rating outlook.

This is a first time rating on Herbst Gaming, LLC.

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.

Herbst Gaming, LLC (Herbst) owns and operates casinos in Nevada and the Midwest, and slot routes including approximately 6,100 machines throughout Nevada. Other revenue segment includes gasoline and convenience store sales, lottery ticket sale fees, ATM fees, payphone charges, rental income and other miscellaneous items. Herbst Gaming, LLC was formed in Nevada on March 29, 2010 to acquire substantially all of the assets of Herbst Gaming Inc. pursuant to the plan of reorganization under Chapter 11. The company generates annual net revenues of about $630 million.

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 assigning 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
Peter H. Abdill, CFA
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 assigns B2 CFR and stable rating outlook to Herbst Gaming, LLC
No Related Data.
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