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Rating Action:

Moody's assigns (P)B2 rating to Codere's bond issue; changes outlook to stable from negative

22 Jul 2010

Madrid, July 22, 2010 -- Moody's Investors Service has today assigned a provisional (P)B2 rating to the proposed EUR100 million senior notes due 2015 to be issued by Codere Finance (Luxembourg) S.A. on the same terms as Codere's previously issued EUR660 million notes, rated B2. Concurrently, Moody's has changed the outlook to stable from negative on the B1 corporate family rating (CFR) and probability of default rating (PDR) of Codere S.A. as well as the existing B2-rated notes after affirming all ratings.

Moody's issues provisional instrument ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.

"Moody's decision to change the outlook on Codere to stable from negative reflects the stabilization in the company's operating performance, which has allowed Codere to maintain an adequate financial profile and credit metrics for the B1 rating category," says Iván Palacios, a Moody's Vice President -- Senior Analyst and lead analyst for Codere.

"In addition, the company's liquidity profile and headroom under covenants has improved following the recent refinancing of the company's revolving credit facility and the elimination of the Qualifying Country Covenant included in the original facility agreement."

"The change in outlook also reflects that Codere's geographically diversified operations as well as its cost-cutting and capex efficiency efforts are allowing the company to mitigate the impact on its Spanish operations of the very challenging domestic macroeconomic environment with the stronger performance of its businesses in Argentina and Mexico," adds Mr. Palacios.

Moody's believes that, from H2 2010 onwards, Codere's operating performance will benefit from the growth in machine park as well as the technological upgrade of machines in Argentina, the recovery in its Mexican operations to more normalized levels following the impact of the smoking ban implemented in Q3 2009, and the new operation of Video Lottery Terminals in Italy. Moody's believes that these factors will drive revenue and EBITDA improvements, which support the stabilization of the company's financial profile and credit metrics at the B1 rating level.

The stabilized rating outlook on Codere also takes account of the recently announced transaction with Grupo Caliente relating to the restructuring of its contractual relationship with Codere, as well as the planned acquisition of Thunderbird Resorts Inc.'s 63.6% stake in six casinos in Panama. Moody's views both transactions as neutral to the rating, in light of the marginal impact that they will have on the consolidated credit metrics.

While the transaction with Grupo Caliente will allow Codere to become the majority owner (67.3% stake) of all of its gaming licenses and halls in Mexico and benefit from their incremental EBITDA generation, the acquisition of the equity stakes in the casinos in Panama will strengthen Codere's position in this market and create synergies with its existing operations in the country.

Nevertheless, these considerations are offset by concerns related to the complexity of the transaction with Grupo Caliente, which involves capitalizing a portion of Caliente's obligations to Codere worth USD171 million and injecting USD75 million in order to repay Caliente's outstanding tax liabilities.

Upon the completion of these two transactions and the expected improvement in operating performance, Moody's expects Codere's overall leverage metrics to remain at current levels of Total debt/EBITDA (as adjusted by Moody's) of around 4.0x, and free cash flow generation to be positive. The stabilization of Codere's outlook assumes that these transactions will not represent a drain on the group's future cash flow and reflects the expectation that Codere will execute its business plan as outlined.

The proceeds from the proposed EUR100 million bond issuance will be primarily used to repay amounts outstanding under Codere's revolving credit facility and other long-term debt obligations. A successful completion of the bond issuance will therefore improve the liquidity profile of the company by increasing availability under the revolving credit facility.

According to Moody's, the ratings could come under downward pressure if adjusted leverage trends towards 4.5x as a result of a material weakening in operating performance or a change in the company's financial policy. Ratings could also come under pressure if the company faces a significant reduction in liquidity or if it experiences stress on its financial covenants.

Moody's has tightened the guidance for Codere's leverage at the B1 rating to reflect (1) the increase in business risk resulting from Codere's progressive shift from the relatively low-risk and mature European operations to the more volatile and higher-growth Latin American operations, which are now contributing 77% of consolidated EBITDA generation; and (2) the increased complexity in the group's structure following the Caliente and Thunderbird transactions, as the group will be fully consolidating these two entities, while its ownership stake is 67.3% and 63.6% respectively.

Upward pressure on the ratings is likely to be constrained by (1) the company's appetite for expansion; (2) the increasing proportion of cash flows generated in emerging markets; and (3) the presence of the PIK note at the shareholder level.

The last rating action on Codere was implemented on 4 October 2008, when Moody's changed the outlook on the company to negative.

The principal methodology used in rating Codere was Moody's "Global Gaming Industry Rating Methodology", published in December 2009 and available on www.moodys.com in the Ratings Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Codere is a Spanish-based gaming operator with a focus on gaming machines, bingo halls, off-track betting facilities, casinos and horse race tracks. The company has operations in Spain, Argentina, Mexico, Italy and several other Latin American countries. In the 12 months ending March 2010, Codere generated revenues of EUR968 million and EBITDA of EUR230 million.

Madrid
Ivan Palacios
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)B2 rating to Codere's bond issue; changes outlook to stable from negative
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