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Rating Action:

Moody's assigns B2 rating to Gala Coral

12 Jul 2010

First time rating

London, 12 July 2010 -- Moody's Investors Service has today assigned a B2 corporate family rating (CFR) to Gala Electric Casinos Limited ('Gala Coral' or 'the company'). The expected family recovery rate is 65%, reflecting the above average recovery expectation for this essentially first lien only capital structure, which translates into a B3 probability of default rating (PDR). The rating outlook is stable. This is the first time that Moody's has rated Gala.

The B2 CFR for Gala Coral reflects the still high adjusted leverage for Gala as it emerges from restructuring (expected by Moody's to be around 6.8x on a Debt/EBITDA basis at the 2009/10 year-end) combined with challenges in particular from (i) a difficult-to-predict macro-economic environment, (ii) the turn-around task at Gala Bingo and (iii) the repositioning of the underperforming sports book within Gala Coral's online activities. These risks are tempered by the company's strong offline market position as the most diversified gaming operator in the UK, a realistic business plan with a likely return to visible free cash flow generation from 2011 onwards and a more sustainable capital structure following the restructuring.

Gala Coral is an integrated gambling operator with on- and off-line activities, mainly in the UK. The group also has operations in Italy. The company's bingo clubs and casinos operate under the Gala brand name while the group's retail betting operations use the Coral brand in the UK and the Eurobet name in Italy. The company's Remote division provides the umbrella for its online activities, which use the relevant off-line brand (Gala, Coral) for its activities.

Following a 2003 leveraged buy-out of Gala's bingo activities and the subsequent acquisition of Coral Group's betting business in 2005, Gala Coral emerged with a debt burden that, although not out of line with market practices at the time, subsequently proved to be unsustainable in the medium term. Consequently, the company entered into discussion with its senior and mezzanine bankers during the second half of 2009 with a view to restructuring its balance sheet ahead of an eventual covenant breach. Final restructuring plans were agreed in May 2010 and the restructuring closed in mid-June 2010. Following the restructuring funds managed by Apollo, Cerberus, Park Square and York Capital indirectly hold a majority in Gala shares.

Key elements of the restructuring are (i) the exit from the company's capital of the previous equity holders, after receiving the benefit from an intercompany debt repayment (GBP 10 million), (ii) the replacement of GBP 570 million (including accrued interest) of mezzanine debt with GBP 450 million of subordinated shareholder debt, which Moody's considers functionally equivalent to equity, (iii) the injection of GBP 210 million of cash equity by the new equity holders, predominantly used to repay senior debt and (iv) the resetting of covenants under the senior facility agreement to provide improved headroom.

Following a small drop in revenues for the financial year ending September 2009 (GBP 1,258 million after GBP 1,269 million), Gala Coral has indicated that it expects trading conditions to remain tough throughout the current financial year. Moody's expects Gala Coral to focus in the near -term on its core strengths in retail betting, machine gambling and effective cost management, while re-vitalizing the bingo and online sports book businesses and developing its earlier stage international presence in Italy. While Moody's believes that 2009/10 revenues will be broadly similar and unadjusted EBITDA levels somewhat weaker compared to the prior year, the rating agency believes that management measures taken to address areas of operational weakness (value strategy in bingo; re-launch of the coral.co.uk website) and a more stable operating environment should result in profit and cash flow improvements from 2010/11. However, the rating agency also notes that significant execution risks remain. Moody's therefore expects leverage to reduce visibly from around 6.8x (including Moody's adjustment for operating leases and including GBP367 million in debt at Gala Coral's legally separated property company(PropCo) which is consolidated in Gala's accounts) in 2009/10 over the next few years. The rating agency also expects that the company will hold total cash in excess of GBP200 million by the 2009/10 year-end. This is well in excess of operational and covenant needs and provides some additional financial flexibility. Gala Coral's net debt position has been aided by around GBP 118 million in VAT refunds from the UK's HMRC to date, and Moody's cautions that any reversal of the refund, which currently appears less likely could have a meaningful negative impact on the company's solid liquidity position.

Gala Coral's stable rating outlook reflects Moody's expectation that following the June 2010 restructuring of the balance sheet Gala Coral will remain on a deleveraging trajectory and that the company will begin to show meaningful EBITDA and free cash flow growth from its financial year 2010/11 onwards.

Moody's regards Gala Coral's liquidity as adequate for its near-term financial and operational requirements. Gala Coral's operating business has reasonable cash conversion characteristics, but interest cost, outflows for restructuring and working capital (after 2009 was managed for cash conservation) are expected to limit free cash flow generation in 2010, before Gala Coral should return to a reasonable level of free cash flow generation in 2011. Apart from cash held on balance sheet (in excess of GBP200 million by the 2009/10 year-end before exclusions for cash in hand/floats, restricted cash and PropCo cash) and internal cash flow generation, the company's remaining source of liquidity is its GBP 50 million RCF (GBP27 million currently utilized for LCs). Moody's believes that these sources should be sufficient to address near- term repayment obligations (FY2011: GBP60 million). Moody's would expect the company to husband cash resources and internally generated cash flows carefully so that FY2012 maturities of GBP 216 million can be addressed and to take timely refinancing steps ahead of repayment dates in FY 2014 and FY2015 when the bulk of the current debt falls due.

Gala Coral's ratings were assigned by evaluating factors that Moody's believes to be relevant to the credit profile of the issuer, such as (i) the business risk and competitive position of the company versus others within its industry, (ii) the capital structure and financial risk profile of the company, (iii) the projected performance of the company over the near to intermediate term, and (iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside of Gala Coral's core industry and Gala Coral's ratings are believed to be comparable to those of other issuers of similar credit risk.

Gala Electric Casinos Limited has its registered office in London, England. Through its subsidiaries it owns and operates a diversified gaming company (sales GBP 1.3 billion for the year ending September 2009) with operations mainly in the UK.

London
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Christian Rauch
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B2 rating to Gala Coral
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