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Rating Action:

Moody's assigns (P)B2 rating to Gala's new senior secured Notes and (P)Caa2 rating to its new senior Notes; stable outlook

16 May 2011

London, 16 May 2011 -- Moody's Investors Service has today assigned a provisional (P)B2 rating to the issuance of GBP250 million senior secured Notes, due 2018, by Gala Group Finance Limited ("GGF") and a provisional (P)Caa2 rating to the issuance of GBP400 million senior Notes, due 2019, by Gala Electric Casinos Limited ("GEC"). It has also upgraded the Probability of Default Rating ("PDR") to B3 from Caa1. The Corporate Family Rating ("CFR") and rating outlook remain unchanged at B3 stable.

Ratings assigned today:

Issuer: Gala Group Finance Limited

- New senior secured Notes rating assigned to new GBP250 million Notes at (P)B2.

Issuer: Gala Electric Casinos Limited

- New senior Notes rating assigned to new GBP400 million Notes at (P)Caa2.

Currently both GGF and GEC are Limited companies. However, prior to the closing of the Notes issuance both will be converted to plcs.

RATINGS RATIONALE

The (P)B2 rating on the new senior secured Notes reflects that they will rank pari passu with the new senior secured facilities and senior to the new senior Notes (rated (P)Caa2). The (P)Caa2 rating on the new senior Notes reflects their contractually and structurally subordinated position and that they will rank behind over GBP1 billion in new financial debt as well as non financial debt such as trade creditors.

The proceeds of the senior Notes issuance are intended to make a Proceeds Loan from GEC to GGF. GGF intends to use the net proceeds from this loan and the senior secured Notes issuance as well as amounts borrowed under the new senior secured facilities to repay the existing senior facilities.

The senior secured Notes will be jointly and severally guaranteed on a senior basis by all the material and certain other subsidiaries that guarantee the new senior secured credit facilities, other than subsidiaries in Italy. For the year ended September 2010, excluding the PropCo group, these represented approximately 95% of total assets and 95% of EBITDA before exceptional items. The senior Notes will be guaranteed on a subordinated basis by the same subsidiaries.

GEC's CFR remains unchanged at B3. This reflects (i) GEC's high leverage (as adjusted by Moody's) expected at around 7x in FY2011, (ii) the turnaround task recently undertaken at the Coral division, (iii) the continued loss of market share to large competitors and (iv) the company's historic lack of investment. These risks are tempered by the company's still strong offline market position as the most diversified gaming operator in the UK, new consumer focussed management with strong retail experience and well-established brands with significant barriers to entry in offline.

The ratings also reflect the company's weak credit metrics and uncertainty about the pace at which these might improve given the macroeconomic uncertainties prevailing and the high competitive intensity in some of its markets. However, the ratings also incorporate the positive steps taken by Gala Coral to improve its operations, as evidenced by the recent turnaround at Gala Bingo, and new management's plans to improve customer focus, product development and portfolio management.

If the refinancing of the existing senior facilities is successful then Moody's would recognise the company's ability to access the capital markets and the associated refinancing of all its outstanding financial debt. In doing so it will have extended the maturity profile from an average life of 2.9 years to 7.3 years as well as improving covenant headroom. The new senior secured facilities contain maintenance covenants referencing net leverage, interest cover, fixed charge cover and capex spend and the rating agency assumes that the initial headroom will be set between 20-25%.

The new senior secured and senior Notes will both benefit from incurrence covenants including a 2x fixed charge coverage test. However, the senior secured Notes will not benefit from the bank debt's maintenance financial covenants. Although the senior secured Notes indirectly rank pari passu with the bank debt following enforcement, control over enforcement processes is the exlusive right of the senior facility lenders until they hold less than 25% of the outstanding aggregate principal amount.

The upgrade of the PDR to B3 (in line with the CFR) from Caa1 solely reflects the change to a capital structure that consists of both bank and bond debt from an all bank structure. Concurrently, Moody's assumption of the group recovery rate has been reduced to 50% from 65%

The stable outlook reflects Moody's expectations that recent strategic initiatives to improve customer focus and product development as well as increased capital expenditure leads to EBITDA growth and a reduction in leverage from 2012 onwards. It also incorporates an assumption that the company preserves at all times an adequate liquidity profile.

Positive rating pressure could develop if GEC succeeds in halting the decline in underlying staking levels in Coral, while maintaining its improved performance in Gala Bingo, with adjusted leverage falling to under 6.5x, EBIT/Interest coverage above 1.2x and meaningful positive free cash flow. Conversely, negative pressure could quickly materialise if GEC's leverage were to increase above 7.5x on an adjusted basis or if the company's EBIT/interest coverage ratio were to decline below 1x. The rating could also come under pressure if the criteria set for the stable outlook were not met or if the company is unable to refinance its existing senior facilities.

Moody's issues provisional 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.

Gala Electric Casinos Limited and Gala Group Finance Limited 's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Gala Electric Casinos Limited and Gala Group Finance Limited 's core industry and believes Gala Electric Casinos Limited and Gala Group Finance Limited 's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Gala Electric Casinos Limited has its registered office in London, England. Through its subsidiaries it owns and operates a diversified gaming company (sales GBP 1.2 billion for the year ending September 2010) with operations mainly in the UK. Following the closing of a restructuring in June 2010, funds managed by the principle investors (Apollo, Cerberus, Park Square and York Capital) indirectly hold a majority in Gala shares.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties 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 maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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.

London
Douglas Crawford
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)B2 rating to Gala's new senior secured Notes and (P)Caa2 rating to its new senior Notes; stable outlook
No Related Data.
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