New York, January 06, 2021 -- Moody's Investors Service today revised Churchill Downs Incorporated's
(CHDN) outlook to stable from negative. Moody's also affirmed
CHDN's Ba3 Corporate Family Rating, Ba3-PD Probability
of Default Rating, Ba1 senior secured, and B1 senior unsecured
ratings. Churchill's SGL-2 Speculative Liquidity Rating
remains unchanged.
Moody's decision to revise CHDN's rating outlook to stable
from negative follows the company's recent announcement[1]
that it repaid approximately $545 million of outstanding revolver
borrowings from its existing cash resources. Pro forma for the
repayment, the company has about $546 million of availability
under its revolver, and approximately $50 to $60 million
of unrestricted cash.
"The revolver repayment along with a lower cost structure and relatively
strong quarterly results reported for the quarter ended 30-Sept
2020, a trend Moody's believes will continue despite the ongoing
effects of COVID-19, has improved the company's ability
to bring its debt-to-EBITDA leverage back down to a range
more consistent with CHDN's Ba3 Corporate Family Rating by the end of
2021 - between 4.5x and 5.5x times,"
stated Keith Foley, a Senior Vice President at Moody's.
"Additionally, the stable outlook assumes CHDN's gaming
and horse racing businesses will continue to operate without interruption
and that capacity restrictions will be eased over time," added
Foley. CHDN's debt/EBITDA pro forma for the revolver repayment
on a Moody's adjusted basis for the latest 12-month period
ended September 2020 was 8.4x and significantly affected by several
months of temporary asset closures during March through June related to
the coronavirus pandemic.
Moody's also assumes in the stable outlook that CHDN will maintain good
liquidity including the ability to comfortably meet the 4.0x senior
secured debt-to-EBITDA leverage ratio covenant that returns
during the 30-September 2021 quarter. On April 28,
2020, CHDN entered into the second amendment to its credit agreement,
which provided for a financial covenant relief period through the fiscal
quarter ending June 30, 2021. Senior secured covenant leverage
was about 3.4x as of September 2020 and Moody's estimates
was approximately 2.8x pro forma for the revolver repayment.
Moody's took the following rating actions:
Affirmations:
..Issuer: Churchill Downs Incorporated
.... Probability of Default Rating,
Affirmed Ba3-PD
.... Corporate Family Rating, Affirmed
Ba3
....Senior Secured Bank Credit Facility (revolver
and term loan), Affirmed Ba1 (LGD2)
....Senior Unsecured Regular Bond/Debenture,
Affirmed B1 (LGD5)
Outlook Actions:
..Issuer: Churchill Downs Incorporated
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
CHDN's credit profile and Ba3 CFR reflects the strong history,
popularity and performance of the Kentucky Derby along with the company's
practice of operating with moderate leverage during normal operating conditions.
Also viewed favorably is the consistent and stable performance of TwinSpires.com,
the company's horse racing digital wagering platform.
Key credit concerns include the highly discretionary nature of consumer
spending on traditional gaming and betting activities in general.
Additionally, despite some level of asset, product and geographic
diversity, the Kentucky Derby continues to account for a significant
portion of the company's consolidated segment EBITDA. Also of concern
are CHDN's current high leverage, continued pressure from efforts
to contain the coronavirus, potential for a slow longer-term
recovery, and long-term fundamental challenges facing regional
gaming companies.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Moody's
analysis has considered the effect on the performance of CHDN from the
current weak US economic activity and a gradual recovery for the coming
year. Although an economic recovery is underway, it is tenuous,
and its continuation will be closely tied to containment of the virus.
As a result, the degree of uncertainty around our forecasts is unusually
high. Moody's regards the coronavirus outbreak as a social risk
under our ESG framework, given the substantial implications for
public health and safety. The gaming sector has been one of the
sectors most significantly affected by the shock given its sensitivity
to consumer demand and sentiment. More specifically, the
weaknesses in CHDN's credit profile, including its exposure
to travel disruptions and discretionary consumer spending have left it
vulnerable to shifts in market sentiment in these unprecedented operating
conditions and CHDN remains vulnerable to the outbreak continuing to spread.
CHDN, like other casinos owners and operators, is exposed
to elevated social risks, particularly in terms of evolving demographic
and societal trends that may drive a change in demand away from traditional
casino style gaming. The risks are somewhat mitigated by having
non-gaming attractions including hotels, restaurants,
bars, and entertainment venues.
Data security and customer privacy risk is elevated given the large amount
of data collected on customer behavior. In the event of data breaches,
the company could face higher operational costs to secure processes and
limit reputational damage.
Governance factors include targeting a moderate leverage level,
but with event risk related to debt-funded acquisitions.
The company also pays a dividend that weakens free cash flow.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include a high degree of confidence
that the gaming sector has returned to a period of long-term stability,
positive free cash flow and the maintenance of good liquidity, and
the ability and willingness of CHDN to achieve and maintain debt/EBITDA
at 4.0x or lower on a Moody's adjusted basis.
A downgrade could result if revenue and earnings decline due to renewed
facility shutdowns, reduced visitation or increased competition,
it appears that CHDN will not be able to achieve and maintain debt/EBITDA
below 5.5x on a Moody's adjusted basis, or liquidity
deteriorates for any reason.
CHDN is a racing, online wagering and gaming entertainment company
that owns and operates: The Kentucky Derby; three pari-mutuel
gaming entertainment venues in Kentucky: Derby City Gaming,
Oak Grove Racing, Gaming, and Hotel, and Newport Racing
and Gaming; TwinSpires.com, which is the largest online
horse racing wagering platform in the U.S.; Sports
betting and iGaming through the BetAmerica platform in multiple states;
and brick-and-mortar casino gaming with approximately 11,000
slot machines and video lottery terminals and 200 table games in eight
states. CHDN is organized in 3 reporting business segments:
Churchill Downs, On-line Wagering, and Gaming.
Net revenue for the latest 12- month period ended September 30,
2020 was $1,056 billion. The company is publicly traded
(NASDAQ:CHDN).
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
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Regulatory disclosures contained in this press release apply to the credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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
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available on www.moodys.com.
REFERENCES/CITATIONS
[1] Form 8-K (SEC) 04-Jan-2021
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.
Keith Foley
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
John E. Puchalla, CFA
Associate Managing Director
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