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Rating Action:

Moody's rates Jacobs' 2nd Lien notes tack-on B2, affirms B2 CFR

01 Feb 2019

New York, February 01, 2019 -- Moody's Investors Service, ("Moody's") assigned a B2 rating to Jacobs Entertainment, Inc.'s (Jacobs) proposed $35 million guaranteed senior secured second lien notes tack-on due 2024 and affirmed the company's Corporate Family rating at B2, Probability of Default rating at B2-PD, and existing senior secured second lien notes at B2.

The approximate use of proceeds of the new notes will be to repay the company's existing revolver balance ($3.5mm), fund the acquisition of three truck stops in Louisiana ($17.8mm), financing and transaction fees ($3.1mm) and supplement cash balances ($11.7mm) for planned growth capital spending. Including the debt tack-on, Moody's estimates Jacobs pro-forma gross debt/EBITDA will increase to 6.5x from 6.2x as of LTM 9/30/2018 while EBIT/Interest will remain around 1.3x.

The affirmation reflects Jacobs' revenue market share that generally exceeds its fair share of units in all markets, its stable operating performance, good liquidity that reflects its sizable cash balances, and positive free cash flow generation before growth capital expenditures. The affirmation also reflects Moody's view that the expansion of surface parking in the company's Black Hawk market, the integration of its recently acquired Sands Regency property in Reno, its newly acquired truck stops, and further investments in Reno will add incremental earnings over the next two years to support the increase in debt due to the debt tack-on.

Over the next 12-18 months, Jacobs will continue to have elevated capital spending to support investments in Reno and Black Hawk. Moody's expects the company can fund a significant portion of its spending plans from free cash flow with potentially modest draws under the revolver. Moody's estimates gross debt/EBITDA will peak at around 6.6x in 2019 and decline below our downgrade target by year end 2020.

The note tack-on will be issued pursuant to rule 144A and the company will not be required to complete a registered exchange offer for file a registration statement for resale of the notes.

Assignments:

..Issuer: Jacobs Entertainment, Inc.

....Senior Secured Regular Bond/Debenture, Assigned B2 (LGD4)

Outlook Actions:

..Issuer: Jacobs Entertainment, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Jacobs Entertainment, Inc.

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior Secured Regular Bond/Debenture, Affirmed B2 (LGD4)

RATINGS RATIONALE

Jacobs' rating is constrained by its small scale in terms of revenue and EBITDA and its earnings concentration of nearly 75% in two markets, Colorado and Louisiana, above average debt/EBITDA at 6.5x pro-forma for the acquisition of 3 truck stops, and the need to continue the integration and improvement of the Sands Regency in Reno, Nevada - acquired in July 2017. Additionally, Black Hawk, CO operations will be negatively impacted temporarily by new supply (about 8%) expansion at a competitor facility that is expected to open in the second quarter of 2019. Jacob's revenue market share generally exceeds its fair share of units in all markets. The Louisiana truck stop operations provide a level of earnings stability because the state has implemented a law that limits the locations of new direct competitors. Reno's regional economy is growing and will support improving gaming demand.

Rating Outlook

The stable rating outlook reflects Jacobs' good liquidity, cash flow generation over the next 12 months that will be sufficient to fund a large portion of maintenance and growth capital spending plans, and modest EBITDA growth from projects such as the expansion of surface parking in the company's Black Hawk market and the integration of its recently acquired Sands Regency property in Reno. The stable outlook also incorporates the likelihood of an increase in debt/EBITDA above our downgrade trigger in 2019 due to the negative impact of new supply at an existing competitor in Black Hawk and the $35 million tack-on to its existing second lien notes to fund the acquisition of 3 truck stops in Louisiana. However, we expect the supply will be absorbed and credit metrics will drop below our downgrade trigger by 2020.

What Could Change the Rating - Up

A ratings upgrade would require debt/EBITDA approaching 4.5 times and EBIT/interest maintained above 2.5 times.

What Could Change the Rating - Down

Jacobs' ratings could be downgraded if leverage exceeds our peak estimate or if EBITDA growth does not materialize at pace necessary to reduce leverage below 6.25 times or if EBIT/interest drops well below 1.5 times over the next 12 to 24 months. Weakening of the company's liquidity position or competitive position in one of its key markets could also pressure the ratings.

The principal methodology used in these ratings was Gaming Industry published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Peggy Holloway
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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