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Rating Action:

Moody's downgrades Gala Coral to B3 from B2; stable outlook

15 Apr 2011

London, 15 April 2011 -- Moody's Investors Service has today downgraded Gala Electric Casinos Ltd's ("Gala Coral" or "the company") Corporate Family Rating (CFR) to B3 from B2 and Probability of Default Rating (PDR) to Caa1 from B3. The outlook on the ratings is stable.

RATINGS RATIONALE

"The downgrade to B3 reflects Moody's view that the company's operating performance in FY2011 will be significantly worse than expected as result of declines in the casino, and more importantly the core Coral divisions", says Douglas Crawford, Moody's lead analyst for Gala Coral. "The downgrade also assumes that the company will only start to reduce leverage from FY2012 onwards."

The B3 CFR reflects (i) Gala Coral'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. Additionally, there are a variety of initiatives, showing early promise, that are planned for introduction within the next year or two. Moody's also expects the company to increase capital expenditure to support growth across virtually all of its divisions over the next few years following a period of underinvestment in the business.

In H1 FY2011, the company reported trading behind budget and the prior year, with an effect from the extreme weather seen in December and January. The Coral division suffered as a result of declines on amounts staked and Casinos was impacted by a lower drop per head (DPH) and some high roller losses. However, the value strategy introduced last year in Gala Bingo is continuing to pay off, with spend per head recovering. Moody's expects most of these trends to continue through FY2011, leading to a decline in EBITDA versus FY2010.

Moody's regards Gala Coral's current liquidity position as adequate for its requirements. Gala Coral's operating business has good cash conversion characteristics and Moody's expects positive free cash flow in FY2011. The company had cash at Bank and in hand of GBP259 million as of 12 March 2011 (before exclusions for cash in hand/floats, restricted cash and PropCo cash). In addition, Gala Coral benefits from an undrawn GBP50 million revolving credit facility of which GBP30 million is utilised for guarantees. Covenant headroom is also currently seen as adequate but as the covenants step down this is likely to tighten if the decline in the company's EBITDA continues unabated into FY2012. However, following a prepayment of GBP60 million of senior debt in November 2010, the first significant debt maturities are now in FY2012, when approximately GBP214 million of bank facilities are due. Moody's would expect the company to husband cash resources and internally generated cash flows carefully so that these maturities can be addressed.

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 and will address the FY2012 debt maturities in a timely fashion.

Positive rating pressure could develop if Gala Coral 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.

Negative pressure could quickly materialise if Gala Coral'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.

Gala Electric Casinos Ltd.'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 Ltd. 's core industry and believes Gala Electric Casinos Ltd. '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 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
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Gala Coral to B3 from B2; stable outlook
No Related Data.
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