S&P: Pinnacle Entertainment Inc. Senior Unsecured Debt Rating Affirmed At 'BB-' On $125 Million Notes Add-On (Recovery: 3)
Our 'BB-' corporate credit rating and negative outlook on Pinnacle are unchanged. This transaction is a debt-for-debt exchange and, as a result, has a minimal impact on our base-case credit measures.
Although the notes add-on will modestly reduce recovery prospects for unsecured lenders, our recovery rating on the notes remains '3', indicating our expectation for meaningful recovery (50% to 70%; capped; upper half of the range). This is because we cap the recovery rating on unsecured debt of issuers with a corporate credit rating in the 'BB' rating category even though our estimated recovery on Pinnacle's unsecured notes would indicate recovery in the 70% to 90% range (compared to estimated recovery in the 90% to 100% range prior to the add-on). The cap addresses the fact that these creditors' recovery prospects are at greater risk of impairment by the issuance of additional priority or pari passu debt prior to a default.
For the complete corporate credit rating rationale, see our research update on Pinnacle, published March 30, 2016 on RatingsDirect.
RECOVERY ANALYSISKey Analytical FactorsOur recovery rating on the senior secured credit facility (consisting of a $400 million revolver due 2021, $185 million term loan A due 2021, and $300 million term loan B due 2023) remains unchanged at '1'. Our recovery rating on the upsized senior unsecured notes ($500 million pro forma for the transaction) remains unchanged at '3'. Our simulated default scenario contemplates a default in 2020 driven by prolonged economic weakness, significantly greater competitive pressures across the company's various markets, and a reduced interest in gaming as a form of entertainment. In addition, we believe the large-fixed rent payment to Gaming & Leisure Properties Inc. reduces operating flexibility, potentially leading to greater cash flow volatility. We assume that 85% of the $400 million revolver is drawn at the time of default. We assume a reorganization at default using an emergence multiple of 7x to value the company, reflecting its diversified gaming portfolio. Simulated Default AssumptionsYear of default: 2020EBITDA at emergence: $180 millionEBITDA multiple: 7xSimplified WaterfallNet enterprise value (after 5% admin. costs): $1.2 billionSecured debt: $775 million--Recovery expectation: 90% to 100%Senior unsecured debt: $515 million--Recovery expectations: 50% to 70% (capped; upper half of the range)Note: All debt amounts include six months of prepetition interest.
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