News Column

Fitch Affirms Boyd's and Peninsula's 'B' IDRs ; Borgata at 'B-'

August 1, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the long-term IDRs of Boyd Gaming Corp. (Boyd) and Peninsula Gaming LLC (Peninsula) at 'B'. Fitch also affirms Marina District Finance Company, Inc.'s (Borgata) IDR at 'B-'. The Rating Outlook for Boyd and Peninsula is Stable while the Rating Outlook for Borgata remains Positive. A full list of issue specific rating actions follows at the end of the release.

Fitch links the IDRs of Boyd and Peninsula and views them on a consolidated basis, though it views Borgata's credit profile largely on a standalone basis. Peninsula is Boyd's wholly-owned unrestricted subsidiary and Borgata is a 50/50 JV, which Boyd manages and consolidates into its financials. The full rating linkage rationale is discussed below.

KEY RATING DRIVERS

Boyd/Peninsula

Boyd's 'B' IDR reflects a diversified asset base and healthy free cash flow (FCF) profile. These positive credit considerations are offset by Boyd's high, albeit sustainable, leverage and significant exposure to weak regional casino markets.

Fitch calculates gross leverage for Boyd for period ending June 30, 2014 at 7.6x, which includes Peninsula along with the $147 million seller's note at Peninsula's HoldCo. This offers minimal equity cushion as regional assets typically trade in 7x-8x multiple range. Fitch deems this sustainable especially when taking Boyd's healthy FCF profile. Boyd's stand-alone leverage is slightly better at 7.4x; however, Fitch believes including Peninsula in Boyd's ratios is appropriate given the high likelihood that Boyd merges Peninsula into its restricted group in the near-to-medium term. Boyd has stated that it intends to merge Peninsula into its restricted group and Peninsula's unsecured notes become callable this August at 106.28.

Boyd's FCF is strong for its rating level and reflects a limited development pipeline, heavy mix of LIBOR based bank debt and $1.1 billion in federal-level NOLs. Fitch estimates Boyd's discretionary FCF run-rate at approximately $165 million, which includes about $55 million of FCF at Peninsula.

Fitch's estimate for Boyd's FCF run-rate incorporates (estimates include Peninsula):

--$517 million of LTM property EBITDA for period ending June 30, 2014;

--$50 million of corporate expense;

--$200 million of interest expense;

--$0 of income tax;

--$100 million of maintenance CapEx.

Boyd could potentially reduce its interest expense by roughly $10 million over the next six months as its 9.125% Boyd notes and 8.375% Peninsula notes become callable this year. The potential interest expense savings could be offset if short term interest rates increase. This would increase the cost associated with the $2.2 billion of credit facility loans outstanding (including $770 million at Peninsula). Most of the loans have a LIBOR floor of 1%; therefore, rising rates is not a near-term concern.

Longer-term, Borgata could be in a position to make distributions as its leverage declines below 4.5x, the threshold for making restricted payments in Borgata's credit agreement. That may occur as early as 2015 and annual distributions to Boyd could be in the $10 million-$20 million range per Fitch's base case.

The strong FCF profile offsets the risk associated with Boyd's operating mix, which is generally weak with a large exposure to regional markets. Fitch's base case for the wholly-owned assets incorporates a 3% revenue decline for full year 2014, 2% decline for 2015 and 0.4% decline for 2016. The 2% decline estimate for 2015 takes into account Fitch's 5% decline estimate for Boyd's Midwest/South segment, which reflects increased competition in Lake Charles, LA. In other years Fitch sees flat to low-single digit growth in Boyd's Nevada segments (about a third of wholly-owned EBITDA) offset by low-single digit declines across Boyd's regional markets.

Fitch projects EBITDA margins to remain stable. This in part reflects Fitch's expectation that the better performing Nevada properties will have greater EBITDA flow-through relative to the higher taxed regional assets.

Regional trends continue to be weak year-to-date through June, with more mature markets showing mid-single digit declines in more recent months. The common theme sounded by regional casino operators is that the weakness stems largely from the lower-tier customers.

Fitch attributes the weakness in regional gaming to near-term and long-term headwinds. Near-term, the end of the federal unemployment benefits at year-end 2013 and the individual health insurance sign-ups related to the implementation of the Affordable Care Act (ACA) are having an impact. Annualized unemployment benefits are down $31 billion in the 1Q'14 and the Congressional Budget Office expects six million to be enrolled in an ACA-compliant plan in 2014, with about five million getting some form of a subsidy. Longer-term headwinds include stagnant wages among the 99%; reprioritization of discretionary income; lower interest rates (which affects investment income) and proliferation of lower cost, more convenient gaming (e.g. video gaming terminals at bars, casino-themed social games, and lottery).

Borgata

Borgata's Positive Outlook reflects the property's stabilizing operating trends and the prospect for improved financial profile following the property tax settlement with the City of Atlantic City and ability to refinance its 9.875% senior notes this year. Fitch may upgrade Borgata's IDR to 'B' once leverage declines closer to 6x, which may occur within 6-to-12 months once Borgata receives the $88 million tax settlement. The 'B-' IDR continues to take into account Borgata's leading position in the Atlantic City market.

In June 2013 Borgata entered into a settlement agreement with the City of Atlantic City to reduce its tax assessment for tax years 2011-2014. Per the settlement Borgata is entitled to an $88.25 million refund for years 2011-2014 and a tax credit of $17.85 million for 2014. Borgata's assessed value for 2015 will also be reduced. Boyd estimates run-rate annual savings from the reduced assessment at $24 million.

Additionally, a court ordered refund of $48 million for years 2009 and 2010 is being appealed by the city. The $88 million refund hinges on the city's ability to issue bonds. The city was able to access the market to issue $63 million in bonds in December 2013 with a coupon of 5% and more recently issued short-term bond anticipation notes at 1.75% in February 2014.

The Upstate New York casino licenses will be awarded this fall. Fitch would view a casino(s) in Orange County, NY receiving a license negatively. Orange County is located just 30 minutes north of the densely populated northern New Jersey. Fitch estimates that a casino in Orange County could negatively impact Atlantic City casinos' revenues by 5%-10% whereas casinos in the more distant Sullivan County, NY (the Catskills region) would pressure revenues by less than 5%.

An Orange County casino proposal winning a license would not necessarily preclude an upgrade, but would tighten the cushion in Borgata's IDR against further operating pressure. An upstate casino would not open until late 2016 or early 2017. This gives enough time for Borgata to build in balance sheet cushion by prepaying debt using FCF and the property tax settlement proceeds.

Besides Upstate New York, new competition could come online in Philadelphia and in northern New Jersey. Another Philadelphia casino would only have a modest negative impact on Borgata since there are already four Philadelphia-area casinos (including one within the city borders). A casino in northern New Jersey is a lower probability event given that it requires legislative and voter approvals but would be more impactful on Borgata. Fitch estimates less than 5% revenue impact from another Philadelphia casino and possibly greater than 10% impact from a casino in northern New Jersey.

Fitch estimates Borgata's run-rate FCF at about $65 million, which provides some cushion against further competition in the Northeast. The FCF run-rate estimate incorporates:

--$126 million of LTM EBITDA, plus

--$12 million of additional annual property tax savings ($12 million of the $24 million in annualized savings was recognized in the second-quarter 2014), plus

--$7 million estimated negative impact from the harsh 2013/2014 winter; minus

-- $55 million of interest expense assuming the 9.875% notes are refinanced with debt with interest of 6.75% (same as the incremental term loan issued last year); minus

-- $25 million on maintenance CapEx.

Fitch views Borgata's and Boyd's rating linkage as weak given that Borgata is only 50% owned by Boyd. Additionally, Borgata operates in a difficult, competitive market and Borgata and Boyd do not share brands and have distinct loyalty programs. Borgata's exposure to online gaming increases the strategic linkage consideration; however, online gaming has started off slow generating a loss of $5 million in the first half 2014. Fitch expects online gaming profitability to improve but does not expect cash flows from online gaming to exceed $15 million in the near- term.

RATING SENSITIVITIES FOR BOYD & PENINSULA (Fitch Forecasts in parentheses)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-- Boyd's Debt/EBITDA ratio excluding Borgata moving towards 8x (FY14: 7.6x and FY15: 7.5x);

-- Discretionary run-rate FCF declining towards or below $75 million (FY14: $155 million and FY15: $141 million);

-- Same-store regional markets revenues continue to decline in the low-to-mid single digit range;

-- Boyd pursuing a REIT spin-off or an M&A activity that would result in rent adjusted leverage to increase.

Positive: No positive rating action is expected over the next 12-24 months given the company's high leverage. However, positive rating action may result from:

-- Debt/EBITDA declining below 6x (FY14: 7.6x and FY15: 7.5x);

-- Discretionary run-rate FCF exceeding $200 million (FY14: $155 million and FY15: $141 million);

-- Regional markets being flat or growing on same-store basis;

-- Consolidation of Peninsula into Boyd's restricted group.

RATING SENSITIVITIES FOR BORGATA (Fitch Forecasts in parentheses)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

-- Borgata's debt/EBITDA ratio declining below 6x (FY14: 5.1x and FY15: 4.6x);

-- Discretionary run-rate FCF approaching or exceeding $50 million (FY14: $63 million and FY15: $77 million);

-- Receipt of the $88 million property tax refund from the City of Atlantic City, using the proceeds to repay debt;

-- Continuation in stable revenue trends;

-- Additional clarity with respect to the Upstate New York licenses (an Orange County license would be viewed negatively).

Negative: At a 'B-' IDR there is some cushion against operating pressure. However, negative rating action may result from:

-- Borgata's debt/EBITDA ratio moving towards 8x (FY14: 5.1x and FY15: 4.6x);

-- Discretionary run-rate FCF declining below $10 million (FY14: $63 million and FY15: $77 million);

-- Resumption of negative revenue trends;

-- New Jersey expands land-based gaming outside of Atlantic City.

Fitch affirms the following ratings:

Boyd Gaming Corp.

--Long-term IDR at 'B';

--Senior secured credit facility at 'BB/RR1';

--Senior unsecured notes at 'CCC+/RR6'.

Peninsula Gaming LLC (Peninsula Gaming Corp. as co-issuer):

--Long-term IDR at 'B';

--Senior secured credit facility at 'BB/RR1';

--Senior unsecured notes at 'CCC+/RR6'.

Marina District Finance Company, Inc. (Borgata)

--Long-term IDR at 'B-';

--Senior secured payment priority revolving credit facility at 'BB-/RR1';

--Senior secured incremental term loan at 'B+/RR2';

--Senior secured notes at 'B+/RR2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013);

--'U.S. Gaming Recovery Models - First-Quarter 2014' (July 24, 2014);

--'Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)' (July 8, 2014);

--'U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)' (Jul. 21, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

U.S. Gaming Recovery Models - First-Quarter 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753081

Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752040

U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751939

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843919

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Alex Bumazhny, CFA, +1-212-908-9179

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Michael Paladino, CFA, +1-212-908-9113

Senior Director

or

Committee Chairperson

John Witt, CFA, +1-212-908-0673

Senior Director

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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