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Rating Action:

Moody's assigns B3 CFR to Great Canadian Gaming; outlook stable

07 Jun 2021

Toronto, June 07, 2021 -- Moody's Investors Service, ("Moody's") assigned a B3 Corporate Family Rating ("CFR") and B3-PD Probability of Default Rating to Great Canadian Gaming Corporation (New) ("Great Canadian"). At the same time, Moody's assigned B2 senior secured ratings to the company's proposed C$650 million first lien term loan, C$250 million revolving credit facility and C$650 million secured notes, all due 2026 and issued in US dollar equivalents. Moody's also assigned a Caa2 senior unsecured rating to the proposed C$400 million (USD equivalent) notes due 2027. The outlook is stable.

Proceeds from the issuances totaling C$1.7 billion, together with cash equity of C$1.65 billion, will fund Apollo Global Management, Inc.'s ("Apollo") acquisition of Great Canadian in a going private transaction totaling about C$3.7 billion.

Assignments:

..Issuer: Great Canadian Gaming Corporation (New)

.... Probability of Default Rating, Assigned B3-PD

.... Corporate Family Rating, Assigned B3

....Gtd. Senior Secured First Lien Term Loan, Assigned B2

....Gtd. Senior Secured First Lien Revolving Credit Facility, Assigned B2

....Senior Secured Regular Bond/Debenture, Assigned B2

....Senior Unsecured Regular Bond/Debenture, Assigned Caa2

Outlook Actions:

..Issuer: Great Canadian Gaming Corporation (New)

....Outlook, Assigned Stable

RATINGS RATIONALE

Great Canadian (B3 CFR) is constrained by: (1) high leverage, with Moody's adjusted debt to EBITDA remaining well above 10x in 2021 before declining to around 6x by year end 2022; (2) sustained negative free cash flow through 2022 and execution risk around pending capital deployment at the Ontario Gaming GTA Limited Partnership (One Toronto Gaming, "OTG"); (3) financial policy risks under private equity ownership; and (4) longer-term social risks including demographic shifts away from traditional casino-style gaming. The company benefits from: (1) wide geographic diversification across 26 properties in four provinces, with proximity to major metropolitan areas (Toronto and Vancouver); (2) strong market positions, including the absence of competing operators within Ontario bundles; (3) favorable provincial regulatory frameworks given high barriers to entry and other supportive measures, including a capital incentive program in British Columbia and actions in both Ontario and British Columbia to support operations following sustained closures due to COVID-19; and (4) a stable pre-pandemic operating track record.

The stable outlook reflects Moody's expectation that Great Canadian will maintain adequate liquidity as operations ramp up, with leverage declining to around 6x by year end 2022.

Great Canadian has adequate liquidity. Pro-forma for the transaction and on a fully consolidated basis, Moody's estimates that sources total about C$900 million compared to uses of C$250 million over the next year. At transaction close, sources will consist of $215 million in cash on hand, full availability under the company's C$250 million revolver due 2026, about $400 million of available credit under the OTG's non-recourse revolving and capital expenditures credit facilities, and a sponsor-funded equity commitment reserve equal to six months of interest (about $40 million). The equity commitment will remain funded and cover a six-month period of interest payments until gross gaming revenue reaches 65% or more of 2019 baseline revenues for a consecutive four-quarter period. Uses include negative free cash flow of close to $230 million, $6 million in mandatory debt amortizations and Moody's estimate of about $12 million in debt repayments under the 50% excess cash flow sweep for the restricted group, which excludes OTG. Additional upcoming debt maturities include OTG's non-recourse revolving and capital expenditures credit facilities due March 2023, which we expect to be fully drawn at around C$1.1 billion by year end 2022 (about $610 million outstanding as of March 2021). The company has limited flexibility to generate liquidity from asset sales.

The revolving credit facility is subject to a springing net first lien leverage ratio when drawings exceed $87 million. While we do not expect the company to utilize the facility over the next twelve months, it would remain in compliance given flexibility under the credit agreement while operations are ramping back up. Compliance with the springing covenant is not required until after four full fiscal quarters following the close of the transaction, or earlier, if restricted group revenues reach 85% or more of 2019 baseline levels in any corresponding quarter. During the period the springing is exempt from being tested, Great Canadian will be required to maintain minimum liquidity of at least C$150 million, which includes unused capacity under the revolver and cash and cash equivalents, excluding cage cash.

Great Canadian's secured first lien facilities are rated B2, one notch above the B3 CFR, reflecting higher recovery in the capital structure. The unsecured notes are rated two notches below the CFR at Caa2, reflecting their junior position behind the secured debt, which includes 50% of OTG's secured debt.

As proposed, the new credit facility is expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following: (1) incremental debt capacity up to the sum of (x) the greater of C$312 million and 1x of LTM EBITDA, (y) plus unlimited secured amounts so long as net first lien leverage ratio (excluding cage cash) does not exceed 4x. Amounts up to the greater of C$312 million and 1x of LTM EBITDA may be incurred with an earlier maturity date than the initial term loans; (2) There are no express "blocker" provisions which prohibit the transfer of specified assets to unrestricted subsidiaries; such transfers are permitted subject to carve-out capacity and other conditions; (3) Non-wholly owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit protective provisions limiting such guarantee releases; (4) there are no express protective provisions prohibiting an up-tiering transaction. The above are proposed terms and the final terms of the credit agreement may be materially different.

Great Canadian remains highly exposed to social risks arising from the direct impact of the COVID-19 outbreak on business operations as well as the health and safety of patrons and employees, which has led to prolonged casino closures and operations at reduced capacity to comply with social distancing requirements. The company also has exposure to social risks relating to demographic changes and shifting consumer preferences as younger generations are less likely to access traditional casino-style gaming (particularly more profitable slot machines). Great Canadian has a strategy focused on modernizing its properties and developing attractive food & beverage and live entertainment to appeal to a broader customer base and more casual gamers.

Potential changes in gaming regulation to address social issues such as problem gambling and crime prevention represents additional risks that could also impact profitability and set precedents for new regulations across provinces. Data security and customer privacy risks are also elevated and in the event of a breach, the company could face higher operational costs to secure processes and limit reputational damage. Risks around regulatory shifts and data security are partially mitigated by well-established internal controls and geographic diversification across Canada.

Governance considerations include risks associated with private equity ownership under Apollo and the potential for financial strategies and policies that favor shareholders, including high financial leverage and debt-funded shareholder distributions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Great Canadian maintains Moody's adjusted debt/EBITDA comfortably below 6x (well over 10x expected during 2021) and EBIT/interest above 2x (0x expected in 2021) while generating positive free cash flow and maintaining good liquidity.

The ratings could be downgraded if liquidity weakens or operational performance is impacted by a slower than anticipated recovery, if Moody's adjusted debt/EBITDA remains above 8x in 2022 (well over 10x expected during 2021) or if EBIT/interest declines to under 1x (0x expected in 2021). The ratings could also be downgraded if there is delay in refinancing the non-recourse facilities at the GTA joint venture.

Great Canadian Gaming Corporation, headquartered in Ontario, is a gaming and entertainment operator with 26 properties located in British Columbia, Ontario, Nova Scotia, and New Brunswick, including over 19,000 slot machines, over 700 table games, 65 dining amenities and over 500 hotel rooms. Upon closure of the transaction, Great Canadian will be majority owned by Apollo Global Management.

The principal methodology used in these ratings was Gaming Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244702. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Whitney Leavens
Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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